Modvat credit cannot be denied for a technical job-work movement breach when inputs and duty-paid final goods are undisputed.

Modvat credit under Rule 57F(2) could not be reversed where inputs were lawfully sent directly to job workers under an approved procedure, the inputs themselves were undisputed, and duty had been paid on the finished goods; the failure of processed goods to physically enter the principal manufacturer's factory was only a procedural lapse and did not justify denial of credit. By contrast, penalty and confiscation were sustained because final products were found unrecorded in statutory registers, and that conduct was treated as a contravention warranting penal consequences.

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Issues: (i) Whether Modvat credit taken under Rule 57F(2) was liable to be reversed because the inputs were sent directly to job workers and the processed goods were not physically brought into the principal manufacturer's factory; (ii) whether the penalty and confiscation of the unrecorded final products were sustainable.

Issue (i): Whether Modvat credit taken under Rule 57F(2) was liable to be reversed because the inputs were sent directly to job workers and the processed goods were not physically brought into the principal manufacturer's factory.

Analysis: The procedure permitted direct movement of raw materials to the job worker under the approved application. The authority had accepted this arrangement earlier. The inputs were not disputed, duty had been paid on the final goods, and the alleged defect was only that the processed goods did not physically enter the factory premises in every case. The breach, if any, was procedural and did not show wrongful availment of credit or suppression of material facts.

Conclusion: The reversal of Modvat credit was not justified and the assessee succeeded on this issue.

Issue (ii): Whether the penalty and confiscation of the unrecorded final products were sustainable.

Analysis: The final products were found unentered in the statutory records, and the authority treated the conduct as a contravention of the procedural rules. The confiscation was already treated leniently with a redemption fine, and the penalty was viewed as warranted because the assessee had bent the rules for convenience.

Conclusion: The penalty and confiscation were sustained.

Final Conclusion: The appeal succeeded only to the extent of setting aside the demand for reversal of Modvat credit, while the penalty and confiscation order remained intact.

Ratio Decidendi: Where inputs are duly received, duty is paid on the final products, and the alleged lapse is only a technical breach of the movement procedure, Modvat credit cannot be denied merely because the goods did not physically pass through the principal manufacturer's factory in the prescribed manner.

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