Modvat credit for export clearances by a 100% EOU cannot be denied on Rule 17 grounds outside the notice.

Modvat credit on inputs used in final products cleared for export by a 100% EOU was held admissible because such clearances were neither exempted goods nor goods chargeable to nil rate of duty. The adjudicating authority could not expand the dispute to consider whether the credit would be useful to the assessee, as that question was outside the show cause notice and outside the scope of adjudication. Rule 17 of the Cenvat Credit Rules, 2002 was inapplicable to eligibility of input credit in this context, so denial of credit was unsustainable.

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Issues: Whether modvat credit was admissible on inputs used in the manufacture of final products cleared for export by a 100% EOU, and whether Rule 17 of the Cenvat Credit Rules, 2002 could be invoked to deny such credit after the appellate authority had already held that the clearances were neither exempted nor chargeable to nil rate of duty.

Analysis: The dispute before the appellate authority was confined to the admissibility of modvat credit on inputs used in exported final products. Once it was found that the clearances of the 100% EOU could not be treated as exempted goods or goods chargeable to nil rate of duty, the authority ought to have granted relief on the issue actually raised. The authority could not enlarge the controversy by examining whether the credit would be of use to the assessee, as that question was outside the show cause notice and outside the scope of adjudication. Rule 17 of the Cenvat Credit Rules, 2002, which deals with DTA clearances by a 100% EOU on payment through account current, had no application to the question of eligibility of modvat credit on inputs.

Conclusion: The denial of credit was unsustainable, and the assessee was entitled to the benefit of modvat credit.

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