Modvat credit on capital goods requires actual factory receipt; fresh availment without prescribed procedure was rejected, while penalty was reduced.

Modvat credit on capital goods is admissible only when the duty-paid goods are actually received in the manufacturer's factory under the prescribed procedure and used for manufacture. Credit already reversed could not be taken afresh where the goods were not received back in the appellant's factory but remained in another unit, and arguments based on transfer to a subsidiary, revenue neutrality, or job-work were rejected for non-compliance with the rule. The credit demand was therefore sustained. On penalty, the equal penalty was found excessive in the circumstances and was reduced to Rs. 5 lakhs.

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Issues: (i) Whether Modvat credit on capital goods was admissible when the credit was taken again after reversal, although the capital goods had not been received in the appellant's factory and were lying in another unit's ; (ii) Whether the penalty imposed required interference.

Issue (i): Admissibility of Modvat credit on capital goods depended on the statutory requirement that the specified duty-paid capital goods must be received in the manufacturer's factory under cover of duty-paying documents and used in the factory for manufacture of final products. The appellant had already reversed the credit when the capital goods were shifted and thereafter took credit afresh without the goods being received back in its factory. The plea based on transfer to a subsidiary, revenue neutrality, and the job-work provision was rejected because the prescribed procedure under the relevant rule was not followed.

Conclusion: The credit taken on 29-3-1999 was not admissible and the finding was against the appellant.

Issue (ii): The Tribunal found that, although the credit demand was sustainable, the facts justified interference with the quantum of penalty. The imposition of equal penalty was therefore considered excessive in the circumstances.

Conclusion: The penalty was reduced to Rs. 5 lakhs and, to that extent, relief was granted to the appellant.

Final Conclusion: The appeal failed on the substantive credit issue but succeeded in part on the penalty aspect, so the impugned order was sustained with modification of the penalty.

Ratio Decidendi: Modvat credit on capital goods is admissible only when the capital goods are actually received in the manufacturer's factory in accordance with the prescribed procedure; a fresh availment of credit without such receipt is impermissible.

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