Modvat reversal and proof of clearance determine duty liability; unsupported demands fail, but suppression can defeat limitation.

When Modvat credit on duty-paid inputs was reversed before internal transfer to the spare parts department, a fresh duty demand could not be founded merely on the higher later sale price, and that demand was set aside. A demand confirmed without recorded reasons could not stand and was also set aside. The large demand relating to alleged clandestine clearance was remanded for fresh consideration because the factual record needed further examination, while the demand on imported-input sub-assemblies was sustained for want of documentary proof of indigenous input use or Modvat entitlement. The limitation plea failed because suppression was inferred from non-disclosure in statutory returns.

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Issues: (i) Whether duty was payable on inputs transferred to the spare parts department after reversal of Modvat credit and later sold at higher prices; (ii) whether the demand of Rs. 2,62,989.72 was sustainable without recorded reasoning; (iii) whether the demands relating to alleged clandestine clearance and imported-input sub-assemblies were sustainable, and whether limitation barred the demands.

Issue (i): Whether duty was payable on inputs transferred to the spare parts department after reversal of Modvat credit and later sold at higher prices.

Analysis: Where Modvat inputs had already suffered duty and the credit taken had been reversed before transfer, the subsequent sale price in the spare parts division did not justify a fresh duty demand on the higher price. The applicable principle was that the original assessment on the inputs was not to be reopened at the stage of internal transfer to the spare parts department.

Conclusion: The demand on this count was set aside in favour of the assessee.

Issue (ii): Whether the demand of Rs. 2,62,989.72 was sustainable without recorded reasoning.

Analysis: The demand was confirmed by the adjudicating authority without explaining the basis for its computation or justification. A demand cannot stand when it is affirmed without reasons supporting the conclusion.

Conclusion: The demand was set aside in favour of the assessee.

Issue (iii): Whether the demands relating to alleged clandestine clearance and imported-input sub-assemblies were sustainable, and whether limitation barred the demands.

Analysis: For the large demand relating to disputed clearances, the record required further examination on the assessee's claim that a substantial portion of the inputs was non-Modvatable and that the documents could reconcile the transactions. The matter was therefore remanded for fresh consideration. By contrast, the demand relating to imported sub-assemblies was upheld because no concrete documentary evidence was produced to show use of indigenous inputs or entitlement to Modvat credit. On limitation, the use of private transfer notes not reflected in statutory returns supported a finding of suppression.

Conclusion: The large demand was remanded, the imported-sub-assembly demand was upheld against the assessee, and the plea of limitation failed.

Final Conclusion: The appeal succeeded only in part: some demands were set aside, one major demand was remanded for reconsideration, one demand was sustained, the limitation defence failed, and the penalty issue was left open for decision by the Commissioner on remand.

Ratio Decidendi: When Modvat credit has been validly reversed before transfer, a fresh duty demand cannot be based merely on a later internal sale price; however, where the assessee fails to produce documentary proof supporting its claim regarding input character or indigenous content, the demand may be sustained, and suppression can be inferred from non-disclosure in statutory returns.

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