MODVAT credit on rejected ingot scrap was allowed where goods retained identity and duty-paid character under endorsed gate passes.

MODVAT credit was held admissible on rejected ingot scrap and ingot cuttings received under endorsed gate passes because the goods retained their duty-paid character and were shown to be the same ingots originally cleared by the manufacturers. The fact that the gate passes described the goods as "rejected" did not by itself prove that the inputs received by the assessee were different or lose identity. In the absence of contrary evidence dislodging the suppliers' explanation, the demand and penalties were not sustainable.

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Issues: Whether MODVAT credit was admissible on rejected ingot scrap and ingot cuttings received under endorsed gate passes.

Analysis: The inputs supplied to the assessee were found to be the same ingots originally received by the intermediary suppliers from the manufacturers, who had thereafter rejected them as unfit for re-rolling and sold them as ingot scrap or ingot cuttings. The mere presence of the word "rejected" on the gate passes did not alter the duty-paid character of the goods or establish that the inputs received by the assessee were different from those originally cleared. No contrary evidence was shown to disprove the identity of the goods or to dislodge the explanation given by the suppliers.

Conclusion: MODVAT credit was admissible and the demand and penalties were not sustainable; the assessee succeeded and the Revenue appeals failed.

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