Reasonable classification under Modvat credit rules failed where imported petroleum inputs were treated like differently taxed domestic supplies.

Imported petroleum inputs that bore full additional customs duty could not be clubbed with domestic public sector refinery purchases burdened only to the effective 10% under the administered price mechanism, because the two classes were materially different and a uniform Modvat restriction lacked rational nexus. The later prospective amendment itself showed that directly imported inputs required separate treatment, so extending the 10% credit cap to imported non-APM inputs for the intervening period was discriminatory. The retrospective application of the notification to imports was therefore said to offend Articles 14 and 19(1)(g), and the notification was treated as unconstitutional in relation to imported non-APM products.

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Issues: (i) Whether importers of petroleum inputs paying full additional customs duty could be clubbed with purchasers from domestic public sector refineries paying only the effective 10% duty under the administered price mechanism. (ii) Whether the restriction of Modvat credit to 10% ad valorem could validly be applied to imported non-APM inputs for the intervening period before the later prospective amendment. (iii) Whether the impugned notification, as retrospectively applied to imported inputs, violated Articles 14 and 19(1)(g) of the Constitution of India.

Issue (i): Whether importers of petroleum inputs paying full additional customs duty could be clubbed with purchasers from domestic public sector refineries paying only the effective 10% duty under the administered price mechanism.

Analysis: The imported inputs had actually suffered duty at 15% ad valorem, while domestic refinery purchases were effectively burdened only to the extent of 10% because the remaining incidence was absorbed through the Oil Pool Account. The two classes were thus differently situated in fact and in law. A uniform restriction on credit ignored this material distinction and treated unequal classes as if they were identical.

Conclusion: The two categories could not validly be treated as the same class; the clubbing was impermissible.

Issue (ii): Whether the restriction of Modvat credit to 10% ad valorem could validly be applied to imported non-APM inputs for the intervening period before the later prospective amendment.

Analysis: The later notification acknowledged that directly imported inputs were not meant to remain under the same restriction and excluded such imports prospectively. Once the Government accepted that imported inputs had borne the full duty and required separate treatment, continuing the 10% cap for the earlier period lacked a rational nexus with the object of the measure and resulted in discriminatory treatment.

Conclusion: The 10% restriction could not validly be extended to imported non-APM inputs for the intervening period.

Issue (iii): Whether the impugned notification, as retrospectively applied to imported inputs, violated Articles 14 and 19(1)(g) of the Constitution of India.

Analysis: Retrospective fiscal measures are permissible, but they must still satisfy the test of reasonable classification and must not operate arbitrarily. Here, the retrospective restriction targeted a class that had actually paid full duty and was not covered by the administered price mechanism, while the object of the restriction was to prevent excess credit only in respect of domestic APM supplies. The measure, therefore, operated unreasonably and discriminately in its application to imports.

Conclusion: In so far as it applied to imported non-APM products, the notification was unconstitutional and violated Articles 14 and 19(1)(g).

Final Conclusion: The petition succeeded. The impugned notification was quashed and the consequential demand and penalty were set aside in relation to the petitioner's imported inputs.

Ratio Decidendi: A fiscal notification that retrospectively restricts credit must satisfy the test of reasonable classification; where two classes are materially different in the duty actually borne, a uniform restriction without a rational nexus to the object of the measure is discriminatory and unconstitutional.

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