Modvat credit on inputs from a 100% export-oriented unit is capped at additional duty; excess credit denied, penalty set aside.

Modvat credit on inputs received from a 100% export-oriented undertaking was restricted by the governing notification to the additional duty leviable on like imported goods under section 3 of the Customs Tariff Act. Since the assessee had taken credit beyond that ceiling, the excess credit was correctly denied. Penalty was not justified because the over-availment arose from a bona fide dispute on interpretation of law, and no mala fide conduct was shown.

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Issues: Whether the appellants were entitled to Modvat credit of the entire duty paid on inputs received from a 100% export-oriented undertaking, or whether the credit was restricted to the extent of the additional duty leviable on like goods under the relevant notification.

Analysis: The notification governing Modvat credit expressly provided that where inputs were produced or manufactured by a hundred per cent export-oriented undertaking and used in the manufacture of final products in India, the credit was to be restricted to the extent of duty equal to the additional duty leviable on like goods under section 3 of the Customs Tariff Act, 1975. The duty figures on record showed that the total duty paid by the supplier was higher than the admissible additional duty component, and the appellants had availed credit beyond the restricted amount. The denial of excess credit was therefore in accordance with the notification. At the same time, the excess credit had been taken because of a different interpretation of law, and no mala fide conduct was established for imposing penalty.

Conclusion: The restriction on Modvat credit was upheld and the assessee was not entitled to the entire duty paid as credit; the penalty was not sustainable and was set aside.

Final Conclusion: The decision sustained the limitation on Modvat credit under the notification, while granting relief from penalty on the ground that the excess credit arose from a legal interpretation dispute.

Ratio Decidendi: Where a notification governing Modvat credit expressly restricts credit on inputs from a hundred per cent export-oriented undertaking to the additional duty leviable on like goods, credit cannot be taken beyond that ceiling, but penalty is not warranted when the excess credit results from a bona fide interpretation of law.

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