Modvat credit on returned rejected goods was allowed when they were used as inputs in fresh dutiable manufacture.

Modvat credit was admissible on adhesives originally cleared as final products and later returned by the trader as rejected goods, because the returned goods were received under proper invoice, were not re-cleared as such, and were instead used as inputs in manufacturing a different adhesive product cleared on payment of duty. On these facts, the returned goods assumed the character of inputs for the subsequent manufacture, and the restriction relied on by the department did not justify denial of credit. The disallowance was therefore unsustainable.

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Issues: Whether Modvat credit was admissible on adhesives originally cleared as final products but later returned by the trader as rejected goods and used as inputs in the manufacture of a different adhesive.

Analysis: The goods had suffered duty when first cleared by the assessee. On return, they were received under proper invoice as rejected goods and were not cleared again as such or merely after rectification. Instead, they were used in the manufacture of another adhesive product, which was cleared on payment of duty. In these circumstances, the returned goods assumed the character of inputs for the subsequent manufacture, and the restriction relied upon by the authorities below did not justify denial of credit.

Conclusion: Modvat credit was admissible and the disallowance was unsustainable.

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