Modvat credit on inputs for capital goods upheld where denial rested on grounds not stated in the show cause notice.

Modvat credit on inputs used in manufacturing an electric arc furnace was held admissible because the show cause notices proceeded only on the basis that the items were used in making the furnace, while credit was denied on the different ground that the furnace was immovable property and not goods. The adjudicating authority could not sustain denial on a basis not alleged in the notices. The furnace was also treated as capital goods under Rule 57Q, and goods fixed to the earth could still qualify if used to produce or process goods. Credit on inputs used in the manufacture of capital goods was further recognised under Rule 57D(2), so the demand failed.

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Issues: Whether Modvat credit was admissible on inputs used in the manufacture of an electric arc furnace, and whether denial of credit on the ground that the furnace was immovable property and not goods could be sustained when the show cause notices proceeded on a different footing.

Analysis: The notices proceeded on the basis that the items listed in the annexures were used in the manufacture of the electric arc furnace, but credit was denied because the furnace was treated as immovable property and therefore not excisable goods. The adjudicating authority, however, recorded that some items were not used in manufacture, although that was not the case made out in the notices. The authority also recognized the furnace as capital goods under Rule 57Q and held that goods fixed to the earth could still qualify as capital goods if used for producing or processing goods. It further held that, with effect from 18-5-1995, Modvat credit on inputs used in the manufacture of capital goods was admissible under Rule 57D(2). On that basis, the sole ground in the notices for denial of credit failed, and no other ground was available to sustain the demand.

Conclusion: Modvat credit on the disputed items was admissible to the assessee, and the denial of credit was unsustainable.

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