Modvat credit on reasonable process loss in inputs cannot be denied where shortages arise during manufacture.

Modvat credit on duty-paid inputs could not be denied merely because annual stock verification showed shortages in lead and zinc concentrates written off in the books. The inputs had been received in the factory, were not removed as such, and the shortages were explained as handling loss, moisture loss and estimation variance in bulk materials. Rule 57D was applied to treat the loss as occurring in the course of manufacture, since credit is not to be denied where inputs become waste or are wasted in or in relation to manufacture. The demand was therefore held unsustainable.

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Issues: Whether Modvat credit could be denied on shortages of lead and zinc concentrates found during annual stock verification and written off in the books, on the ground that the loss was not covered by Rule 57D of the Central Excise Rules, 1944.

Analysis: The inputs were admittedly received in the factory on duty-paid documents and there was no case that they were removed from the factory as such. The shortages were detected during stock-taking and were consistently explained as handling loss, moisture loss, and estimation variance in bulk materials. The percentage of loss was found to be about 1% to 1.5%, which the Tribunal treated as a reasonable process loss. Rule 57D provides that credit shall not be denied or varied merely because part of the inputs becomes waste, refuse, or is wasted in or in relation to the manufacture of the final product. On the facts, the shortages were held to have occurred during the process of manufacture and not to represent ineligible input not used in relation to manufacture.

Conclusion: Modvat credit could not be denied on the shortages, and the demand was unsustainable.

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