Pre-installation Modvat credit on machinery parts allowed; duty on duty-free sale sustained, with limited penalty upheld.

Modvat credit under Rule 57Q could be taken on gobbing stirrers before installation where the goods were classified as parts of machinery under Chapter 84/85, so the demand based solely on pre-installation availment of credit was not sustainable. The duty already paid on one stirrer was directed to be credited in the assessee's RG 23D account against the demand raised on its sale. Duty remained payable on the stirrer removed and sold without payment of duty, and penalty was upheld only for that default, limited to Rs. 1 lakh.

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Issues: (i) whether the amount of duty paid on one gobbing stirrer could be credited in the assessee's RG 23D account against the demand raised on its sale; (ii) whether Modvat credit on gobbing stirrers could be taken before installation where the goods were classifiable as parts of machinery under Chapter 84/85; and (iii) whether penalty was warranted for non-payment of duty on the stirrer sold without payment of duty.

Issue (i): whether the amount of duty paid on one gobbing stirrer could be credited in the assessee's RG 23D account against the demand raised on its sale.

Analysis: The demand arose on sale of a gobbing stirrer, while the assessee sought adjustment of duty already paid on another stirrer. No specific provision for such adjustment was shown, but the assessee maintained RG 23D accounts and had already paid duty on the earlier item. On the facts, the amount paid was directed to be taken as credit in the RG 23D account.

Conclusion: The credit of Rs. 14,39,487/- was permitted in the assessee's RG 23D account.

Issue (ii): whether Modvat credit on gobbing stirrers could be taken before installation where the goods were classifiable as parts of machinery under Chapter 84/85.

Analysis: The gobbing stirrers were classified by Customs under Chapter sub-heading 8475.90. On that basis, they were treated as parts of machinery falling under Chapter 84/85. Since Rule 57Q permitted credit on eligible capital goods and their parts before installation, the credit could validly be taken prior to installation. The demand based on alleged pre-installation availment of credit was therefore unsustainable.

Conclusion: Modvat credit on the gobbing stirrers could be taken before installation, and the related demand was set aside.

Issue (iii): whether penalty was warranted for non-payment of duty on the stirrer sold without payment of duty.

Analysis: Duty was held payable on the stirrer at the time of sale, and it was removed without payment of duty. For that contravention, penalty was justified. However, no penalty was called for on the issue relating to pre-installation credit, since that demand was set aside.

Conclusion: Penalty was upheld only in relation to the duty-free removal and was restricted to Rs. 1 lakh.

Final Conclusion: The assessee succeeded on the Modvat credit issue and on adjustment of the duty already paid, but failed on the duty demand arising from sale of one gobbing stirrer and on the limited penalty imposed for that default.

Ratio Decidendi: Where imported capital goods are classified as parts of machinery under Chapter 84/85, Modvat credit under Rule 57Q can be taken before installation, and a separate demand on that ground cannot be sustained; however, duty remains payable on sale of capital goods without duty payment, attracting limited penalty.

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