Substantial compliance allows Modvat credit where inputs were first stored outside the factory but later used in manufacture.

Modvat and transitional credit were not to be denied merely because inputs were first stored in godowns outside the factory before being moved in for use. The applicable rules contemplated receipt and stock in the factory, but the inputs were duly accounted for, later brought into the factory, and verified as used in manufacture. The Board's circular also recognised practical relaxation for outside storage subject to procedure and conditions. On those facts, the departure from literal factory-receipt requirements was treated as a curable lapse, and substantial compliance with Rules 57G and 57H was sufficient to preserve the credit.

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Issues: Whether Modvat credit and transitional credit were inadmissible merely because the inputs were initially stored in godowns outside the factory and were later moved into the factory for use.

Analysis: The applicable rules required receipt of inputs in the factory under cover of duty-paying documents for availment of Modvat credit and similarly contemplated receipt and stock in the factory for transitional credit. On the facts, the inputs were properly accounted for, subsequently moved from the godowns to the factory, and verified as having been utilised in the manufacture of the final product. The Board's circular also recognised relaxation where inputs were initially stored outside the factory for practical reasons and permitted such storage subject to procedure and conditions. In this background, the deviation from the literal factory-receipt requirement was treated as a curable lapse rather than a disqualifying defect.

Conclusion: The credit was not liable to be denied, as there was substantial compliance with Rules 57G and 57H.

Ratio Decidendi: Where inputs are duly accounted for, subsequently brought into the factory, and actually used in manufacture, Modvat-related credit cannot be denied solely because initial storage occurred outside the factory, if the facts show substantial compliance with the scheme.

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