Modvat credit on intermediate steel billets upheld where scrap fed the manufacturing chain, with no wilful misdeclaration found.

Modvat credit on re-rollable scrap was admissible where the scrap was used to manufacture intermediate steel billets or ingots that were then consumed in making the declared final products. Rule 57D(2) protected credit because inputs used in an in-process material remain eligible even if the intermediate product emerges in a different unit or is not described with exact detail in the declaration. The penalty was not sustainable because the record did not show wilful misdeclaration or intent to evade duty.

---

---

Issues: Whether Modvat credit on re-rollable scrap was admissible where the scrap was used in the manufacture of intermediate steel billets/ingots which were then used in the manufacture of the declared final products, and whether penalty was sustainable.

Analysis: The inputs need not be used directly in the final products if they are used in the manufacture of in-process material that is ultimately consumed in making the final products. Rule 57D(2) protects credit where an intermediate product emerges during the manufacturing chain, and the character of an intermediate product has to be seen in the context of the assessee's manufacturing process. Since re-rollable scrap was used for making steel billets/ingots and those billets/ingots were in turn used for the final products, the credit could not be denied merely because the billets/ingots were manufactured in a different unit or because they were not separately described with exacting detail in the declaration. The record also did not show wilful misdeclaration or intent to evade duty.

Conclusion: Modvat credit on re-rollable scrap was admissible, and the penalty was not sustainable.

Ratio Decidendi: Inputs used in the manufacture of an intermediate product are eligible for Modvat credit when that intermediate product is used in the manufacture of the declared final product, and credit cannot be denied absent wilful misdeclaration or intent to evade duty.

---