Modvat credit cannot be denied for a procedural lapse if actual receipt, processing, and use of inputs are verifiable.

The Modvat scheme is a beneficial credit mechanism, and Rule 57F(2) serves a procedural revenue-control function for sending inputs outside the factory for further processing. Prior permission is required under the rule, but its absence does not by itself defeat credit where the declaration was filed, the goods and final products were covered by the notification, and records can verify receipt back and actual use in the declared end-product. The lapse was treated as genuine, and the matter was remanded for de novo examination of substantial compliance and utilisation of the inputs.

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Issues: Whether Modvat credit could be denied merely because inputs sent out for processing outside the factory were removed without prior permission under Rule 57F(2), when the assessee had otherwise complied with the Modvat requirements and the inputs were stated to have been used in the declared final product.

Analysis: The Modvat scheme is a beneficial provision intended to grant credit of duty on inputs and reduce the burden on the manufacturer. Rule 57F(2) requires prior permission for removing inputs outside the factory for further processing, but the rule is procedural in nature and is meant to safeguard revenue by enabling the authority to impose terms and conditions. The absence of prior permission by itself does not necessarily defeat the concession if the assessee has filed the declaration, the inputs and final products are covered by the notification, and the records can verify that the inputs were in fact received back after processing and used in the declared end-product. The lapse was treated as genuine, and the availability of later permission for similar removals supported the need to examine the matter on the basis of actual utilisation and revenue verification rather than to deny credit outright for the procedural omission.

Conclusion: Modvat credit could not be denied solely for the procedural breach of not obtaining prior permission under Rule 57F(2); the matter had to be re-examined to verify substantial compliance and actual use of the inputs, and the case was remanded for de novo decision.

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