Modvat credit restrictions apply only to named inputs, and credit follows duty actually paid, not passing-on theory.

Notification No. 14/97 was interpreted as restricting Modvat credit only for the inputs expressly named in it; mere inclusion of Residual Fuel Oil and Low Sulphur Heavy Stock in the same tariff sub-heading did not extend the restriction, especially where the goods were distinct and no evidence showed conformity with low sulphur specifications. Modvat credit was also held to depend on the duty actually paid on the input and reflected in the prescribed documents, not on whether the duty burden was fully passed on to the buyer. On that basis, the disallowance of credit, related duty demand, and penalty were unsustainable.

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Issues: (i) Whether Residual Fuel Oil was covered by the restriction on Modvat credit imposed by Notification No. 14/97 only because it fell under the same tariff sub-heading as Low Sulphur Heavy Stock. (ii) Whether Modvat credit could be restricted to the extent of duty said to have been passed on to the buyer, instead of the duty actually paid on the input.

Issue (i): Whether Residual Fuel Oil was covered by the restriction on Modvat credit imposed by Notification No. 14/97 only because it fell under the same tariff sub-heading as Low Sulphur Heavy Stock.

Analysis: The notification restricted credit only in respect of the specified inputs mentioned in it, namely naphtha, furnace oil, low sulphur heavy stock, light diesel oil, bitumen and paraffin wax. Mere inclusion of different petroleum products in the same tariff sub-heading did not enlarge the scope of the notification. The record also showed that Residual Fuel Oil and Low Sulphur Heavy Stock were distinct products, and the Revenue produced no evidence that the goods received by the appellant conformed to the low sulphur specifications of Low Sulphur Heavy Stock.

Conclusion: The restriction under Notification No. 14/97 did not apply to Residual Fuel Oil, and the disallowance of credit on that basis was unsustainable.

Issue (ii): Whether Modvat credit could be restricted to the extent of duty said to have been passed on to the buyer, instead of the duty actually paid on the input.

Analysis: Modvat credit is linked to the duty actually paid on the inputs, as evidenced by the duty-paying documents and invoices. The fact that part of the duty burden may have been absorbed elsewhere or not fully passed on to the buyer was held to be irrelevant. Once the appellant established that credit had been taken only to the extent shown in the documents, the Revenue's objection could not be sustained.

Conclusion: Credit could not be restricted on the theory of partial passing on of duty, and the Revenue's objection failed.

Final Conclusion: The demand of duty and the penalty founded on both objections were held to be contrary to law, and the appellant was entitled to relief.

Ratio Decidendi: A Modvat restriction in a notification applies only to the inputs expressly named in it, and credit is allowable to the extent of duty actually paid on the input as evidenced by the prescribed documents, irrespective of whether the duty burden was fully passed on to the buyer.

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