Modvat credit on inputs lost during manufacture remains allowable when the loss occurs in processing, not on clearance.

Modvat credit on inputs lost during the manufacturing process was treated as allowable where the loss occurred after the inputs were taken into manufacture and not on clearance from the factory. The Revenue did not dispute that the full quantity entered the manufacturing stream, and the loss was explained as arising during processing and re-weighing before feeding into the plant. On that basis, the lost quantity remained attributable to use of the inputs in or in relation to manufacture of the final products, and credit could not be denied merely because some inputs were lost in handling. Rule 57D also preserved credit where inputs were reflected in waste, refuse, or by-product.

---

---

Issues: Whether Modvat credit on inputs lost during the manufacturing process could be denied.

Analysis: The loss of inputs occurred during the course of manufacture and not by clearance of inputs as such from the factory. The Revenue did not controvert that the entire quantity of inputs was taken into the manufacturing process, and the loss was explained as arising at the stage of processing and re-weighing before feeding into the plant. In such circumstances, the lost quantity remained attributable to use of the inputs in or in relation to manufacture of the final products, and the credit could not be denied on the footing that part of the inputs was lost in handling. Rule 57D also protected credit from being varied merely because part of the inputs was contained in waste, refuse, or by-product.

Conclusion: Modvat credit could not be denied on the quantity lost during the manufacturing process, and the demand and penalty were unsustainable.

---