Modvat credit on capital goods can trigger duty on deemed removal when factory premises are leased to another manufacturer.

Capital goods on which Modvat credit had been taken were treated as removed from the factory when the premises were leased to another independent manufacturer, making duty recoverable under the capital-goods utilisation rules; the duty and interest demand against the first appellant was upheld. Suppression was found because the continued presence of the credit-availed goods in leased premises was not disclosed, so the extended period of limitation applied, but the penalty on the first appellant was reduced as excessive. No conscious dealing with goods liable to confiscation was proved against the second appellant, so the penalty on that appellant was set aside.

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Issues: (i) Whether capital goods on which Modvat credit had been taken became liable to duty under Rule 57S of the Central Excise Rules, 1944 when the premises in which they were installed were leased to another independent manufacturer. (ii) Whether the extended period of limitation and penalty were sustainable against the first appellant, and whether penalty was imposable on the second appellant under Rule 209A of the Central Excise Rules, 1944.

Issue (i): Whether capital goods on which Modvat credit had been taken became liable to duty under Rule 57S of the Central Excise Rules, 1944 when the premises in which they were installed were leased to another independent manufacturer.

Analysis: Rule 57Q permits credit on capital goods used in the factory of the manufacturer, and Rule 57S governs their utilization. Where such capital goods are no longer used in the credit-taking manufacturer's factory and the premises are placed in the possession of another independent unit, the goods are treated as removed from the factory. In that event, the statutory conditions for removal require intimation, acknowledgement, and payment of duty as if the capital goods had been manufactured in the factory. The first appellant remained liable because the goods were not shown to continue in its factory and the lease placed the premises under the second appellant's possession.

Conclusion: The demand of duty and interest against the first appellant was upheld.

Issue (ii): Whether the extended period of limitation and penalty were sustainable against the first appellant, and whether penalty was imposable on the second appellant under Rule 209A of the Central Excise Rules, 1944.

Analysis: Suppression was found because the first appellant had not disclosed the continued presence of credit availed capital goods in premises leased to another entity. This justified invocation of the extended period. However, the quantum of penalty on the first appellant was found excessive and was reduced. As regards the second appellant, there was no material showing conscious dealing with goods known to be liable to confiscation, so penalty could not be sustained.

Conclusion: The extended period was sustained against the first appellant, its penalty was reduced, and the penalty on the second appellant was set aside.

Final Conclusion: The principal duty demand was sustained, relief was granted on the quantum of penalty against the first appellant, and the second appellant obtained complete relief from penalty.

Ratio Decidendi: Capital goods on which Modvat credit has been taken are deemed removed from the factory when they cease to remain in the credit-taking manufacturer's factory and are placed in the possession of another unit, and duty is recoverable for such removal under the capital-goods utilization rules; suppression of this fact justifies extended limitation.

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