Modvat credit on returned defective goods upheld; denial on a ground outside the show-cause notice was unsustainable.

Modvat credit was admissible on duty-paid finished goods returned by customers as defective goods for reprocessing, where the reprocessed clearances were used to discharge duty. The Tribunal also held that denial of credit could not be sustained on a ground not set out in the show-cause notice; the appellate authority's additional reasoning that the activity did not amount to manufacture was beyond the notice and therefore invalid. The impugned order was set aside and the assessee succeeded.

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Issues: Whether Modvat credit was admissible on duty-paid finished goods returned by customers for reprocessing, and whether credit could be denied on a ground not stated in the show-cause notice.

Analysis: The goods had been cleared as a finished product, returned because they were defective, and taken back for reprocessing before being used to discharge duty on the reprocessed clearances. The Tribunal noted that the credit denial in the notice rested only on the assertion that finished goods could not simultaneously be treated as inputs. The appellate authority, however, upheld denial on an additional ground that the activity did not amount to manufacture. That reasoning was beyond the notice and could not sustain the order.

Conclusion: Modvat credit was held admissible, and denial based on a ground not set out in the show-cause notice was not sustainable, in favour of the assessee.

Final Conclusion: The impugned order was set aside and the appeal succeeded.

Ratio Decidendi: A demand or denial order cannot be sustained on a ground that travels beyond the show-cause notice, and returned defective goods taken back for reprocessing may support Modvat credit when the notice does not lawfully exclude it on the stated basis.

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