Duty on scrap from capital goods after Modvat credit is taken is payable under the excise rules, while penalty may be set aside.

Where capital goods on which Modvat credit had been taken are later sold as waste and scrap, the excise rules require duty to be paid on the waste and scrap. The dispute turned on interpretation of Rule 57-S(2)(c) of the Central Excise Rules, 1944, and the availing of Modvat credit on the capital goods was not in dispute. Duty on the scrap was therefore upheld and the order confirming duty was restored, while penalty was set aside because the matter involved rule interpretation rather than contumacious conduct.

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Issues: Whether central excise duty was payable on capital goods cleared as waste and scrap after Modvat credit had been availed.

Analysis: The capital goods had been taken on Modvat credit under Rule 57Q of the Central Excise Rules, 1944 and were later sold as waste and scrap on account of continuous use. Rule 57-S(2)(c) expressly provides that where capital goods are sold as waste and scrap, the manufacturer shall pay the duty leviable on such waste and scrap. The dispute was treated as one of interpretation of the rules, and the fact of availing Modvat credit on the capital goods was not in dispute.

Conclusion: Duty was payable on the waste and scrap, and the order confirming duty was restored.

Final Conclusion: The demand of duty on the scrap of capital goods was upheld, while penalty was set aside because the matter turned on interpretation of the rules.

Ratio Decidendi: Where capital goods on which Modvat credit has been taken are sold as waste and scrap, duty is payable on such waste and scrap under the governing excise rules.

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