Modvat credit cannot be denied by substituting a new classification for supplier-approved documents absent wilful misstatement.

Modvat credit under Rule 57-I could not be denied merely because the department sought to reclassify inputs differently from the classification shown in the supplier's duty-paying documents. Rule 57-G(2) required the receiver to take reasonable steps to ensure duty payment as reflected in those documents, but it did not permit the recipient or its jurisdictional officer to override the supplier's classification approved by the supplier's jurisdictional authority. As the supplier was not shown to have made a wilful wrong classification, penalty on the receiving manufacturer was also unjustified. The demand and penalty were therefore unsustainable.

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Issues: Whether Modvat credit demanded under Rule 57-I could be sustained on the ground that the inputs were misclassified in the duty-paying documents, and whether penalty on the receiving manufacturer was justified when the supplier's classification had not been shown to be wilfully .

Analysis: Rule 57-G(2) required the receiver of inputs to take reasonable steps to ensure that duty had been paid as indicated in the accompanying documents, but that obligation did not authorise the recipient or the recipient's jurisdictional officer to reclassify the inputs already classified by the supplier's jurisdictional officers. The classification shown in the documents could not be arbitrarily changed for the purpose of demanding duty from the receiving manufacturer. Since the supplier was exonerated of any wilful wrong classification, there was no basis to fasten penalty on the appellants. The demand was also rejected because the case, in substance, rested on the same disputed reclassification of the inputs.

Conclusion: The demand and penalty were unsustainable and were set aside in favour of the assessee.

Ratio Decidendi: A recipient of duty-paid inputs cannot be made liable for duty or penalty merely because the department seeks to substitute its own classification for the classification approved by the supplier's jurisdictional authority, absent wilful misstatement or suppression.

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