MODVAT credit survives procedural lapses in premises use, but deliberate excise non-compliance can still attract penalty.

Duty-paid inputs used in the declared final products did not lose MODVAT credit merely because receipt and utilisation occurred in an unlicensed premises outside the declared factory; the irregularity was treated as procedural, not a failure of the scheme's substantive conditions, so credit was upheld. By contrast, conscious use of an unlicensed premises and deliberate non-compliance with Central Excise and MODVAT procedure justified penalty, even without proved duty evasion, because actual evasion is not necessary where the statutory breach itself is established. The reference on credit failed, and the penalty challenge also failed.

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Issues: (i) Whether MODVAT credit could be denied merely because the inputs were received and utilised in an unlicensed premises away from the declared factory, despite declaration and actual use in the declared final products; and (ii) whether penalty was justified for deliberate contravention of the Central Excise and MODVAT requirements even in the absence of actual duty evasion.

Issue (i): Whether MODVAT credit could be denied merely because the inputs were received and utilised in an unlicensed premises away from the declared factory, despite declaration and actual use in the declared final products.

Analysis: The declaration under Rule 57G covered the inputs and the final products, and the record showed that the same duty-paid inputs were used in the manufacture of the declared goods. The only infraction was that receipt and utilisation took place in premises not included in the licensed factory. On these facts, the departure was treated as a procedural lapse and not a failure of the substantive conditions of the MODVAT scheme. The benefit could not be denied where utilisation of duty-paid inputs in the declared final product was undisputed.

Conclusion: The MODVAT credit was not required to be denied on the facts of the case, and the Revenue's proposed reference on this issue was rejected.

Issue (ii): Whether penalty was justified for deliberate contravention of the Central Excise and MODVAT requirements even in the absence of actual duty evasion.

Analysis: The manufacturer knowingly used an unlicensed premises for receipt and clearance of goods without including it in the declared set-up, creating a real risk to revenue. The breach was not a mere technical lapse. Penalty under the penal provisions of the Central Excise Rules was considered sustainable where there was conscious disregard of statutory procedure, and actual evasion was not a prerequisite when the violation itself was established.

Conclusion: Penalty was rightly sustained, and the cross-objections challenging the penalty were rejected.

Final Conclusion: The Tribunal upheld the allowance of MODVAT credit on the peculiar facts while sustaining the penalty for deliberate statutory non-compliance, and the reference application as well as the cross-objections were dismissed.

Ratio Decidendi: Where duty-paid inputs are undisputedly used in the declared final product, a merely procedural infraction in the place of receipt or utilisation does not justify denial of MODVAT credit; however, conscious contravention of excise law may still attract penalty even absent proved duty evasion.

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