Modvat credit on subsequently paid customs duty remained admissible where the amount was duty, not penalty, under the end-use condition.

Modvat credit was admissible on additional customs duty paid after a departmental demand under Section 28 of the Customs Act where the end-use certificate could not be produced. The payment was treated as duty arising from non-fulfilment of the notification condition, not as a penalty, so it remained within the scope of Rule 57E of the Central Excise Rules. The departmental demand did not alter the character of the payment or exclude it from credit. The disallowance of Modvat credit was therefore unsustainable, and the appellants were entitled to take credit of the duty subsequently paid.

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Issues: Whether Modvat credit was admissible on the additional customs duty paid subsequently pursuant to a demand under Section 28 of the Customs Act, and whether such payment could be treated as a penalty for non-fulfilment of the end use condition.

Analysis: The appellants had paid the differential customs duty after the Department issued a demand notice because the end use certificate could not be produced. The payment was made towards duty arising from non-fulfilment of the notification condition, not by way of penalty. Once the duty was subsequently paid, the credit mechanism under Rule 57E of the Central Excise Rules became applicable, and the nature of the departmental demand did not take the payment outside the scope of admissible credit.

Conclusion: The appellants were entitled to Modvat credit of the duty so paid, and the disallowance of credit was unsustainable.

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