Modvat credit cannot be denied for procedural lapse alone, though penalty may still stand for non-compliance

Modvat credit was held admissible where the inputs were duty-paid, received in the factory and used in manufacture, even though movement through a job worker did not strictly follow the prescribed procedure under Rule 57F(2) and Rule 57F(3); the procedural lapse could not by itself justify denial of the substantive credit. Penalty, however, was sustained because the admitted non-compliance with the Modvat procedure remained a breach of the prescribed requirements, even though the quantum had already been reduced. The result was that the credit disallowance was set aside while the reduced penalty was maintained.

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Issues: (i) Whether Modvat credit was admissible when the inputs were duty-paid, received in the factory, and used in the manufacture of final products, but the movement through a job worker was not strictly in accordance with the prescribed procedure; (ii) Whether penalty was sustainable for failure to follow the prescribed procedural requirements under the Modvat scheme.

Issue (i): Whether Modvat credit was admissible when the inputs were duty-paid, received in the factory, and used in the manufacture of final products, but the movement through a job worker was not strictly in accordance with the prescribed procedure.

Analysis: The receipt of the goods in the factory and their use in the final product was not in dispute, and the duty-paid character of the inputs was also accepted. The only objection was non-observance of the prescribed procedure governing movement of inputs through a job worker. Modvat credit was treated as a substantive benefit, while compliance with the procedure under Rule 57F(2) and Rule 57F(3) was regarded as procedural in nature. On that basis, denial of credit merely for the procedural lapse was not justified.

Conclusion: Modvat credit was admissible and the issue was decided in favour of the assessee.

Issue (ii): Whether penalty was sustainable for failure to follow the prescribed procedural requirements under the Modvat scheme.

Analysis: Although the substantive credit was allowed, the admitted position remained that the prescribed procedure under Rule 57F(2) and Rule 57F(3) had not been followed. That lapse justified penalty, though the quantum had already been reduced by the lower appellate authority.

Conclusion: Penalty was sustainable and the issue was decided against the assessee.

Final Conclusion: The credit disallowance was set aside, but the reduced penalty was maintained, leaving the appeal only partly successful.

Ratio Decidendi: Substantive tax credit cannot be denied solely for procedural non-compliance where receipt, duty-paid character, and use of inputs are undisputed, though penalty may still be upheld for the procedural breach.

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