Natural justice and Rule 5 refund computation require notice, hearing, and a non-duplicative credit formula.

Refund adjudication cannot stand where part of the claim is rejected without a show-cause notice or personal hearing, because such unilateral action violates natural justice; the partial rejection was set aside. The refund computation under Rule 5 must be made on the total eligible CENVAT credit, and the formula cannot be applied after first deducting inadmissible credit, as that results in a double reduction; the further reduction was also set aside. The assessee was therefore held entitled to the full refund claimed, with consequential relief.

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Issues: (i) Whether rejection of part of the refund claim was unsustainable for want of a show-cause notice and opportunity of hearing; (ii) Whether the refund amount was correctly reduced by applying the formula under Rule 5.

Issue (i): Whether rejection of part of the refund claim was unsustainable for want of a show-cause notice and opportunity of hearing.

Analysis: No show-cause notice was issued specifying the grounds on which the refund was proposed to be rejected, and no personal hearing was granted at the stage of original adjudication. The appellant was therefore deprived of notice of the department's case and of any real opportunity to meet the grounds of rejection. Such unilateral adjudication was held to violate the principles of natural justice and could not be sustained.

Conclusion: The rejection of the refund of Rs. 4,41,981/- was set aside as unsustainable.

Issue (ii): Whether the refund amount was correctly reduced by applying the formula under Rule 5.

Analysis: The formula under the notification required the total CENVAT credit taken on input services to be used for computation. The inadmissible portion was first deducted and the formula was then applied again, resulting in a double reduction. The reduction of the refund by Rs. 83,774/- was therefore based on a application of the formula and could not be upheld.

Conclusion: The reduction of Rs. 83,774/- was set aside.

Final Conclusion: The assessee was held entitled to the full refund claimed, and the appeal succeeded with consequential relief.

Ratio Decidendi: A refund adjudication cannot stand when rejection is made without a show-cause notice and hearing, and the refund formula must be applied on the total eligible CENVAT credit without first deducting inadmissible credit and then applying the formula again.

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