Mandatory Modvat procedure controls external processing of inputs, so non-compliance can deny credit and sustain penalty.

Non-compliance with the mandatory procedure for removing inputs on which Modvat credit had been availed disentitled the assessee to the credit and justified penalty. Aluminium rods taken on credit were sent to job workers for conversion into wire and strips without the required intimation and without proper statutory accounting. The procedural requirements under Rule 57F were treated as substantive safeguards against diversion or misuse, so the plea of actual use in manufacture and absence of mala fide intention was not accepted. The cited case law was found unhelpful, and the denial of credit and penalty were upheld on the facts.

---

---

Issues: Whether Modvat credit was rightly denied and penalty sustained where the inputs were removed for job work without compliance with the prescribed procedure under Rule 57F and were not accounted for in the statutory records.

Analysis: The admitted position was that a sizeable quantity of aluminium rods on which Modvat credit had been taken was not accounted for and had been sent out for conversion into aluminium wire and strips by job workers. The governing procedure required intimation and compliance with the conditions prescribed for removal of inputs on which credit had been availed. Such compliance was not a mere technical formality but a mandatory requirement intended to prevent diversion or misuse of credited inputs. In these circumstances, the plea that the inputs were in fact used in manufacture or that there was no mala fide intention was not accepted, and the case law cited by the appellants was held to be of no assistance.

Conclusion: Modvat credit was not available on the facts, and the penalty was justified; the impugned order was upheld.

Final Conclusion: Non-compliance with the mandatory procedure for removal of inputs on which Modvat credit had been taken disentitled the assessee to the credit and warranted penalty.

Ratio Decidendi: Where credit-linked inputs are removed for external processing without following the prescribed statutory procedure, the breach is substantive and the assessee cannot avoid denial of credit or penalty by asserting ultimate use in manufacture or absence of mala fides.

---