Modvat credit cannot be denied by reclassifying inputs already accepted by the supplier's jurisdictional officers; penalty also fails absent wilful misdeclaration.

Rule 57G(2) required a receiving manufacturer to take reasonable steps to ensure inputs were covered by duty-paid documents, but it did not permit the recipient or local excise officers to reopen a classification already accepted by the competent jurisdictional officers for the supplier. The responsibility for correct classification remained with the officers having jurisdiction over the supplier, and a demand could not rest on an arbitrary reclassification at the recipient stage. Penalty also could not be sustained where the supplier was found not guilty of wilful misdeclaration. The demand and penalty were therefore unsustainable, and consequential relief followed.

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Issues: Whether the receiving manufacturer could be denied Modvat credit and subjected to demand on the ground that the classification shown in the duty-paying documents was allegedly incorrect, and whether penalty could be sustained when the supplier was exonerated of any wilful misdeclaration.

Analysis: Rule 57G(2) required the receiving manufacturer to take reasonable steps to ensure that the inputs were covered by duty-paid documents, but it did not authorise the receiving manufacturer or the local Central Excise officers to reopen or alter a classification already accepted by the jurisdictional officers having control over the manufacturer of the inputs. The responsibility for correct classification rested with the officers having jurisdiction over the supplier, and once that classification had been adopted, the receiving authority could not arbitrarily substitute a different classification and base a demand on that change. Since the supplier had been found not guilty of wilful wrong entry of particulars, there was also no basis to sustain penalty against the recipient on that footing.

Conclusion: The demand and penalty were unsustainable and the appeal succeeded.

Final Conclusion: The impugned order was set aside and the appellant was entitled to consequential relief.

Ratio Decidendi: A receiving manufacturer cannot be made liable to Modvat demand by reclassifying inputs whose classification has already been accepted by the competent jurisdictional officers, and penalty cannot stand in the absence of wilful misdeclaration.

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