Modvat credit cannot be denied for procedural non-compliance alone when inputs are used in manufacture and the claim needs merits review.

Modvat credit on inputs used in or in relation to manufacture cannot be denied solely because duty was not initially paid or the prescribed procedure under Rule 56A was not strictly followed. The Tribunal applied the principle that such credit claims must be examined on merits where the inputs are otherwise eligible, and procedural non-compliance by itself is not decisive. It also noted that the credit claim had not been properly considered by the lower authorities, so fresh adjudication with an opportunity of hearing was required in accordance with natural justice.

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Issues: Whether Modvat credit on inputs used in or in relation to the manufacture of final products could be denied merely because duty had not been paid initially and the prescribed procedure had not been followed, and whether the matter required remand for de novo consideration.

Analysis: The appeal concerned denial of Modvat credit and consequential duty and penalty demands. The Tribunal held that credit could not be denied solely on the ground that the assessee had not complied with the procedure under Rule 56A of the Central Excise Rules when duty had not been paid at the initial stage. Relying on the principle stated in Formica India Division, the Tribunal found that the assessee was entitled to have the credit claim examined on merits. Since the lower authorities had not allowed the credit claim, the matter required fresh adjudication with an opportunity of hearing in accordance with natural justice.

Conclusion: The issue was decided in favour of the assessee to the extent that the impugned order was set aside and the matter was remanded for de novo consideration of Modvat credit.

Ratio Decidendi: Modvat credit cannot be denied merely because the assessee did not initially pay duty or could not strictly comply with the prescribed procedure, where the inputs were used in or in relation to manufacture and the credit claim otherwise requires adjudication on merits.

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