Modvat credit cannot be reduced for concessional inter-unit sales where duty was duly paid on the higher assessable value.

Modvat credit under Rule 57A and related provisions was not reducible merely because the inputs were sold to a sister concern at a concessional price. Credit was tied to the duty actually debited on the inputs and evidenced by the prescribed duty-paying document, not to the internal transfer price between related units. As duty had been computed and debited on the higher assessable value, the concessional sale did not affect entitlement to credit. In the absence of any scheme provision barring such a sale or requiring proportionate reduction, disallowance of credit and the connected penalty were unsustainable.

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Issues: Whether Modvat credit was restrictable merely because the inputs were sold to the recipient at a concessional price, when duty had been paid and debited on the higher assessable value.

Analysis: The credit scheme under Rule 57A onwards allows credit equal to the duty actually debited on the inputs as evidenced by the prescribed duty-paying document. The availability of credit is not linked, expressly or by implication, to the price at which the goods are sold between related units. Since duty had been computed and debited on the higher assessable value, the fact that the consignor charged a lower internal price to its sister concern did not affect the credit entitlement. No provision under the Modvat scheme prohibited such a concessional sale or justified reduction of credit on that ground.

Conclusion: The disallowance of Modvat credit and the penalty were unsustainable. The issue is decided in favour of the assessee.

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