MODVAT credit on fabricated invoices attracts mandatory penalty and interest when the demand is raised after the amended rules.

MODVAT credit taken on fabricated invoices issued by a unit that had not carried on manufacturing activity was treated as inadmissible, and reversal of credit, interest and penalty followed. The notice and adjudication were issued after the introduction of Rule 57-I(4) and Rule 57-I(5), and the binding High Court ruling held that penalty under Rule 57-I(4) was mandatory and could not be avoided merely because the rules came into force on 23-7-1996. The appellant's factual distinction did not displace that ruling, so the order affirming interest and penalty was sustained.

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Issues: Whether the appellant was liable to reversal of MODVAT credit, interest and penalty under Rule 57-I of the Central Excise Rules, 1944 in view of the date of the disputed transactions and the subsequent introduction of the penal and interest provisions.

Analysis: The credit was taken on the strength of invoices found to be fabricated, issued by a unit which had not carried on any manufacturing activity. The notice and adjudication were issued after the introduction of Rule 57-I(4) and Rule 57-I(5), and the High Court had already held that penalty under Rule 57-I(4) was mandatory and that the Tribunal was not justified in deleting penalty and interest merely because the rules came into force on 23-7-1996. The factual distinction suggested by the appellant did not displace the binding effect of that ruling, especially as the disputed notice and order were post-introduction of the provisions and the credit itself was inadmissible.

Conclusion: The appellant was liable to penalty and interest and the order-in-appeal was rightly upheld.

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