Cenvat credit on job-work inputs cannot be denied for mere procedural lapse when goods return and are used in manufacture.

Credit on inputs sent to a job worker could not be denied merely because the prescribed debit under Rule 57F(3A) was omitted, where the inputs were admittedly received back and used in manufacture and the substantive object of the rule was achieved. The disallowance of credit was therefore set aside. Penalty was still attracted for procedural non-compliance, but the absence of wilful breach and the accepted bona fides justified reduction of the penalty to a nominal amount. The assessee succeeded on the credit issue, while the procedural penalty was retained only in reduced form.

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Issues: (i) whether credit taken on inputs sent to a job worker could be disallowed when the inputs were received back and used in manufacture despite non-compliance with the debit requirement under Rule 57F(3A); (ii) whether penalty was warranted and, if so, to what extent.

Issue (i): whether credit taken on inputs sent to a job worker could be disallowed when the inputs were received back and used in manufacture despite non-compliance with the debit requirement under Rule 57F(3A).

Analysis: Rule 57F(3) required intimation and acknowledgment before sending inputs to a job worker, and Rule 57F(3A) required a debit equal to the credit taken when the inputs were sent out. The inputs were admittedly received back from the job worker and used in the manufacture of pesticides. The object of the provision was therefore achieved, and had the debit been made, the assessee would have been entitled to recredit on return of the inputs. On that footing, there was no basis to disallow the credit merely because the debit step had not been followed.

Conclusion: The disallowance of credit was unjustified and was set aside in favour of the assessee.

Issue (ii): whether penalty was warranted and, if so, to what extent.

Analysis: The assessee did not comply with the prescribed procedure, so penalty was attracted in principle. However, the goods were returned after job work and the record did not show a wilful intention to violate the rule. The bona fides were accepted, justifying a reduced penalty.

Conclusion: Penalty was sustained but reduced to Rs. 5,000, partly in favour of the assessee.

Final Conclusion: The assessee succeeded on the credit issue, while the procedural penalty was retained only in a reduced amount.

Ratio Decidendi: Where inputs sent for job work are returned and used in manufacture, credit cannot be denied on a mere procedural lapse if the substantive object of the rule has been achieved; penalty may still be imposed for non-compliance but can be reduced where bona fides are established.

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