Modvat credit and notification choice: demand failed where authorities relied on grounds not stated in the show cause notices.

A manufacturer could opt out of Notification No. 16/97-C.E. during the financial year and avail Notification No. 38/97-C.E. where the notification and binding Board clarification permitted that choice, and there was no bar on taking Modvat credit under Rule 57A while operating under that notification. Demand and penalties were also unsustainable because the authorities sustained them on a new objection-non-fulfilment of Notification No. 38/97-C.E. conditions-not raised in the show cause notices. The operative principle is that excise demand cannot rest on grounds outside the notice, and the original basis for denial failed once the clarification was applied.

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Issues: Whether the assessees were entitled to opt out of Notification No. 16/97-C.E. during the financial year and avail Notification No. 38/97-C.E., and whether denial of Modvat credit could be sustained on grounds not raised in the show cause notices.

Analysis: The show cause notices proceeded only on the footing that the assessees could not switch out of Notification No. 16/97-C.E. before crossing the prescribed clearance limit. The Board's clarification dated 14-7-1997 expressly stated that a manufacturer could opt for the benefit of Notification No. 38/97-C.E. at any time during the financial year and that there was no bar on availing credit of duty under Rule 57A of the Central Excise Rules, 1944 while operating under that notification. The authorities below, however, confirmed the demand by introducing a different objection, namely non-fulfilment of the conditions of Notification No. 38/97-C.E., which was never alleged in the notices. Since the original basis of denial could not survive in view of the clarification, the demand and penalties were not sustainable.

Conclusion: The assessees were entitled to switch from Notification No. 16/97-C.E. to Notification No. 38/97-C.E., and the demand based on grounds beyond the show cause notices was unsustainable.

Ratio Decidendi: A demand cannot be sustained on a ground not set out in the show cause notice, and a manufacturer may opt for Notification No. 38/97-C.E. during the financial year where the notification and binding administrative clarification so permit.

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