2001 (8) TMI 139 - HC - Customs

Court allows petitioners to claim MODVAT credit pre-16-12-1998. Right to credit arises on using inputs. Non obstante clause emphasized.

The court ruled in favor of the petitioners, allowing them to avail the MODVAT credit earned before 16-12-1998. The court held that Clause 5 of the ... MODVAT credit - independent processor - accrued right to credit - retrospective operation - non obstante clause - power under Section 3A of the Central Excise Act - as good as tax paidMODVAT credit - accrued right to credit - retrospective operation - non obstante clause - Clause 5 of the Notification denying independent processors MODVAT credit does not extinguish MODVAT credit already earned in respect of inputs or capital goods used in manufacturing goods prior to 16-12-1998. - HELD THAT: - The Court held that under the MODVAT scheme a right to credit accrues to an assessee when duty is paid on inputs used in manufacture of final products, and such right subsists until the credit facility is worked out or the goods exist. Relying on the principle that MODVAT credit is 'as good as tax paid', the Court concluded that Clause 5 cannot be given retrospective effect so as to nullify credits already earned. The Court also relied on sub-clause (a) of Clause 6 of the impugned Notification, which excepts goods manufactured prior to 16-12-1998 (though cleared thereafter) from the notification's operation, reinforcing that credits relating to such goods survive the amendment. [Paras 6]Petitioners are entitled to avail MODVAT credit earned by them as on 16-12-1998; Clause 5 cannot retrospectively extinguish that credit.Power under Section 3A of the Central Excise Act - independent processor - Subsequent withdrawal of Section 3A (and consequent non-existence of the impugned notification) does not affect the Court's decision that MODVAT credits earned as on 16-12-1998 are available to the petitioners. - HELD THAT: - The Court noticed that Section 3A was withdrawn during pendency of the petitions and the notification thereby lost field, but treated this change as reinforcing the petitioners' position rather than as requiring a separate remand. The determinative legal basis for allowing credit remained the accrued nature of the MODVAT entitlement and the non obstante carveout for goods manufactured prior to 16-12-1998; the legislative change did not warrant denying credits already earned. [Paras 5, 7]In the changed circumstances, petitioners remain eligible to utilise the MODVAT credit earned by them as on 16-12-1998.Final Conclusion: Writ petitions allowed; respondents directed to permit petitioners to avail MODVAT credit earned as on 16-12-1998; no order as to costs. Issues:Challenge to the validity and application of a modified scheme denying MODVAT credit to independent processors of processed textile fabrics.Analysis:The judgment revolves around the challenge to the validity and application of a modified scheme introduced by the Central Government through a notification dated 10-12-1998. The scheme introduced Clause 5, which denied the benefit of utilizing MODVAT credit to independent processors of processed textile fabrics. The petitioners, who are manufacturers and processors of textile fabrics falling under specific headings, argued that they should be allowed to utilize the MODVAT credit lying unutilized before the introduction of the impugned rule. They contended that the MODVAT credit should not lapse due to the new notification.On the other hand, the Revenue argued that the credit in balance as of 15-12-1998 could only be utilized by paying duty as specified in Section 3A of the Act. They claimed that the credit lying unutilized as of 16-12-1998 lapsed due to Clause 5 of Notification No. 36/98-C.E. The Revenue further explained the provisions of the impugned notification, emphasizing the rates of excise duty based on the value of fabric processed by independent processors using a hot-air stenter.During the proceedings, changes occurred in the law with the withdrawal of Section 3A of the Central Excise Act, 1944, and consequently, the relevant notification became non-existent. The petitioners argued that Clause 5 of the impugned notification had become redundant in the changed circumstances, and they should now be entitled to avail the MODVAT credit earned by them before 16-12-1998.The court analyzed the contentions of both parties and referred to the MODVAT scheme, emphasizing that the right to credit becomes absolute when inputs are used in manufacturing the final product. Citing legal precedent, the court reiterated that a credit under the MODVAT scheme was equivalent to tax paid. The court concluded that Clause 5 could not be given retrospective effect to nullify the MODVAT credit already earned by the petitioners. Additionally, the court highlighted the non obstante clause in the impugned notification, which exempted goods manufactured before 16-12-1998 and cleared thereafter.In the final judgment, the court allowed the group of Writ Petitions, directing the respondents to permit the petitioners to avail the MODVAT credit earned by them before 16-12-1998, without imposing any costs.