Modvat credit on salvaged capital goods survives where clearance is made on payment of duty under Cenvat provisions.

Modvat credit on capital goods was held to remain valid where the goods had been lawfully brought into use and credit was originally taken under the scheme, even though they were later destroyed in fire and subsequently salvaged. After clearance of the salvaged goods on payment of duty in accordance with the applicable Cenvat provisions, the rule permitting removal of capital goods on payment of duty at the prescribed rate and value applied. Because duty attributable to the goods was paid on clearance, denial of the credit originally availed was not justified, and the demand and penalty relating to those capital goods were set aside.

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Issues: Whether Modvat credit originally taken on capital goods could be denied when the goods were destroyed in fire but were later salvaged and cleared on payment of duty in accordance with the applicable Cenvat provisions.

Analysis: The capital goods had been validly brought into use and credit had been taken in accordance with the Modvat scheme. On subsequent salvage and clearance, the manufacturer paid duty on the sale value of the goods, and the governing rule permitted removal of capital goods as such on payment of duty at the rate and value prescribed under the Central Excise Act. Since the clearance was made on payment of the duty attributable to the goods, denial of the credit originally availed was not justified.

Conclusion: Denial of Modvat credit on the capital goods was unsustainable and the demand and penalty related to those capital goods were set aside in favour of the assessee.

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