Modvat credit restriction on full-duty inputs lacked rational nexus and was struck down as arbitrary under Article 14.

Notification No. 14/1997-C.E. (N.T.) restricting Modvat credit to 10% for specified petroleum inputs was invalid where manufacturers had actually paid excise duty at 15% on those inputs. The notification was aimed at neutralising unintended excess credit taken by those who had borne only 10% duty, but it grouped together two distinct classes without an intelligible differentia or rational nexus to that object. On that basis, the restriction was treated as manifestly arbitrary, violative of Article 14, and beyond the permissible scope of delegated rule-making power.

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Issues: Whether Notification No. 14/1997-C.E. (N.T.) dated 3-5-1997, restricting Modvat credit to 10% in respect of specified petroleum inputs, was invalid as applied to manufacturers who had actually paid excise duty at 15% on those inputs, and whether such restriction was violative of Article 14 of the Constitution of India and beyond the delegated rule-making power.

Analysis: The notification was issued to withdraw unintended excess credit obtained by manufacturers who had borne duty incidence only to the extent of 10% but had availed credit at 15%. The petitioner, however, had paid excise duty at the full tariff rate of 15% on inputs used for manufacture of chemicals and therefore had not derived the mischief targeted by the amendment. The classification created by the notification clubbed together two distinct classes: those who had borne only 10% duty and those who had actually borne 15% duty. For a valid classification, there must be an intelligible differentia and a rational nexus with the object sought to be achieved. Since the object was only to neutralize unintended excess credit, restricting credit in the petitioner's case had no rational relation to that object. As subordinate legislation, the notification was also liable to be struck down where it was manifestly arbitrary and inconsistent with the enabling power.

Conclusion: The notification was held invalid and unenforceable insofar as it restricted Modvat credit to 10% in cases where the full 15% excise duty had been paid. The petitioner was entitled to avail credit on the basis of actual duty paid and to consequential relief.

Ratio Decidendi: Delegated fiscal legislation that targets a specific mischief cannot validly apply to persons who never fell within that mischief, and a classification lacking intelligible differentia and rational nexus with the object is violative of Article 14.

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