Premature reversal of Modvat/Cenvat credit on damaged goods inside the factory was not sustainable, and penalty was unwarranted.

Where damaged goods remained within the factory and were capable of repair or possible use in manufacture, reversal of Modvat/Cenvat credit was required only on removal or other final disposition under central excise law; a demand raised before that stage was premature. In the absence of any mala fide on the record, penalty was not justified. The demand could not be sustained at that stage, and consequential relief followed.

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Issues: Whether the demand of duty by reversal of Modvat/Cenvat credit on damaged goods lying inside the factory was premature, and whether penalty and interest could be sustained.

Analysis: The goods in question had been received in the factory and were damaged during transit, storage, erection, use or fire, but remained within the factory premises. The Tribunal noted that where damaged goods are capable of repair and possible use in manufacture, duty adjustment or reversal of credit arises only at the time of removal or other final disposition in accordance with central excise law. On these facts, the demand raised on the credit taken was held to be premature. Since the record disclosed no mala fide, the consequential penalty was also found unjustified.

Conclusion: The demand of duty could not be sustained at that stage and the penalty was not justified; the appeal was allowed with consequential relief.

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