Modvat credit for job-worker clearances remained admissible despite procedural lapse and alternative exemption treatment.

Modvat credit was held admissible where inputs were directly despatched to a job worker before formal permission was issued, because the application had disclosed the job worker and the intended arrangement and the later permission covered the same process. The absence of prior formal approval was treated as a procedural lapse only, not a substantive bar to credit. The job worker's clearance of the intermediate product under a different exemption notification, and the use of additional materials or clearance of by-product on duty payment, did not defeat the principal manufacturer's entitlement where the declaration and actual use of the converted inputs in the final products were established. The duty demand and penalty were unsustainable.

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Issues: Whether Modvat credit was admissible where inputs were sent directly to job workers before formal permission was granted, the job worker cleared the intermediate product under a different exemption notification, and there was alleged non-compliance with procedural requirements under the Modvat scheme.

Analysis: The permission application had identified the job worker and the intended direct supply of inputs, and the later grant of permission covered the same arrangement. Direct despatch of inputs to the job worker was treated as a permitted procedure, and the absence of prior formal permission was regarded as a procedural lapse. The fact that the job worker cleared the intermediate product under another exemption notification did not alter the principal manufacturer's credit entitlement, because that choice of clearance by the job worker did not defeat the Modvat scheme. Clearance of by-product on duty payment and use of additional materials by the job worker were also not treated as violations disabling credit. The declaration filed by the assessee and the actual use of the converted inputs in the final products supported the credit claim.

Conclusion: Modvat credit was admissible, and the duty demand and penalty were unsustainable.

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