Modvat credit barred for inputs used in exempt clearances, while demand enhancement beyond the show cause notice was disallowed.
Modvat credit was inadmissible on inputs used to manufacture stainless steel coin blanks cleared without payment of duty, because Rule 57C bars credit where the final product is exempt or chargeable to nil duty. The fact that the clearance was under an ad hoc exemption did not alter the dutiability test, so the disallowance was upheld on merits. The demand enhancement introduced through a corrigendum, however, could not be sustained because it travelled beyond the scope of the show cause notice. The excess demand was set aside and the liability was confined to the amount originally proposed.
Issues: (i) Whether Modvat credit was admissible on inputs used in the manufacture of stainless steel coin blanks cleared without payment of duty under an ad hoc exemption; (ii) whether the demand could be sustained to the extent the corrigendum and appellate confirmation exceeded the amount proposed in the show cause notice.
Issue (i): Whether Modvat credit was admissible on inputs used in the manufacture of stainless steel coin blanks cleared without payment of duty under an ad hoc exemption.
Analysis: The governing principle under Rule 57C of the Central Excise Rules, 1944 is that credit on inputs is not admissible where the final product is exempt from the whole of duty or is chargeable to nil rate of duty. The exemption under Section 5A(1) or Section 5A(2) of the Central Excise Act, 1944 does not alter that position for the purpose of Modvat, because the relevant test is whether the final product is dutiable. Since the coin blanks were cleared without payment of duty, the inputs used for their manufacture could not earn Modvat credit.
Conclusion: Modvat credit was not admissible on the inputs used in the manufacture of the exempted coin blanks, and the disallowance was upheld on merits.
Issue (ii): Whether the demand could be sustained to the extent the corrigendum and appellate confirmation exceeded the amount proposed in the show cause notice.
Analysis: A demand order cannot travel beyond the scope of the show cause notice. The notice and the original order proceeded on a credit figure of Rs. 85,91,276, whereas the corrigendum introduced a higher figure of Rs. 1,09,10,599. That enhancement was beyond the notice and could not be sustained.
Conclusion: The enhanced demand introduced through the corrigendum was set aside, and the disallowance was restricted to Rs. 85,91,276.
Final Conclusion: The appeal succeeded only to the extent of deleting the excess demand introduced beyond the show cause notice, while the denial of Modvat credit on the exempt clearances was maintained on merits.
Ratio Decidendi: Under Rule 57C of the Central Excise Rules, 1944, Modvat credit is inadmissible on inputs used in the manufacture of final products that are cleared as exempt or non-dutiable, and any demand enhancement beyond the show cause notice cannot be sustained.