Modvat credit cannot be denied for a classification-related procedural lapse when inputs were used in declared final products.

Modvat credit on inputs lying in balance could not be denied merely because reclassification and exemption of an intermediate product intervened, where the same inputs were actually used in a continuous manufacturing process for the declared final products. The Tribunal treated the objection as a procedural issue arising from the change in classification, and found no contravention of the Modvat rules since the inputs and their end use remained unchanged after the revised declaration. The substantive credit was therefore upheld, and the denial of Modvat benefit was held unsustainable.

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Issues: Whether Modvat credit on inputs lying in balance could be denied on the ground that, after reclassification and exemption of an intermediate product, such credit was utilised for clearing the declared final products manufactured in the same continuous process.

Analysis: The inputs were admittedly used in the manufacture of the intermediate product and thereafter in the manufacture of fabrics and sacks, which were the declared final products after the revised classification list was filed. The utilisation of credit was found to be in conformity with the relevant Modvat provisions, and the Tribunal treated the objection raised by the department as a procedural matter arising out of the change in classification. Since the inputs and their end use remained the same and the credit was utilised after the relevant declaration, there was no contravention warranting denial of credit.

Conclusion: The denial of Modvat credit was unsustainable and the assessee was entitled to the benefit of the credit.

Final Conclusion: The impugned orders were set aside and the appeal succeeded, with the substantive Modvat benefit being upheld notwithstanding the alleged technical lapse.

Ratio Decidendi: A procedural or classification-related irregularity does not justify denial of Modvat credit where the inputs are actually used in the manufacture of the declared final products in accordance with the governing rules.

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