Modvat credit on returned defective goods upheld where remelting and fresh manufacture established input use in production.

Modvat credit was treated as admissible where defective final products returned by customers were remelted and used in manufacturing fresh final products, because the returned goods were effectively used as inputs in the assessee's factory. The Tribunal followed later decisions in the Alcobex line of authority, which accepted credit in such circumstances, and distinguished Revenue authorities that either pre-dated that line or involved cases with no manufacturing process. It also held that a Board circular could not override the settled judicial position. The Revenue's appeals were rejected.

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Issues: Whether Modvat credit was admissible when defective final products returned by customers were remelted and used in the manufacture of fresh final products.

Analysis: The dispute turned on whether the returned defective goods could be treated as inputs for the subsequent manufacturing process. The Tribunal noted that later decisions following the earlier Alcobex line of authority had accepted admissibility of credit where the returned goods were actually subjected to a manufacturing process in the assessee's factory. It also distinguished contrary decisions relied upon by the Revenue on the footing that they either preceded the relevant line of authority or involved materially different facts, including cases where no manufacturing process was undertaken. The Board's circular was held not to override the settled judicial position.

Conclusion: Modvat credit was admissible to the assessee on the returned defective final products, and the Revenue's appeals were rejected.

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