Modvat credit on returned defective goods used again in manufacture was held admissible as input credit.

Modvat credit was admissible on defective goods returned by customers on payment of duty and re-used by the manufacturer after remelting in the manufacture of final products. Goods rejected as defective and no longer capable of serving their original purpose ceased to retain that character and, when used again in manufacture, answered the description of inputs under Rule 57A. The procedures under Rules 173H and 173L were inapplicable because those provisions cover returned goods not subjected to a further manufacturing process. As the Rule 57G declarations had been filed and acknowledged, the disallowance of credit was unsustainable.

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Issues: Whether Modvat credit was admissible on defective goods returned by customers on payment of duty and used again by the manufacturer in the manufacture of final products.

Analysis: The returned goods had been cleared by the customers under Rule 57F(1)(ii) on payment of duty and were received back under gate passes. After receipt, the goods were remelted and used in the manufacture of the appellants' final products. Goods which are rejected as defective and cannot serve the original purpose cease to retain their character as final products for that purpose and, when used again in manufacture, answer the description of inputs under Rule 57A. The procedure under Rules 173H or 173L was not applicable because those provisions contemplate returned goods not subjected to a process amounting to manufacture, whereas the present goods were put to manufacture again. The declarations under Rule 57G had been filed and acknowledged.

Conclusion: Modvat credit was admissible on the duty paid on the returned defective goods, and the disallowance was unsustainable.

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