Transitional Modvat credit includes notional higher credit for stock inputs from small scale units, unless expressly excluded.

Rule 57H transitional Modvat credit was construed in harmony with the substantive credit scheme, so inputs lying in stock on the declaration date were eligible for the benefit available under the rules. A demand for reversal raised within six months of granting credit was treated as an authorised recovery action under Rule 57I, not an impermissible review of the earlier permission. The phrase "duty paid on inputs" was held to include the notional higher credit available for inputs received from small scale industrial units under the deeming fiction in Rule 57B, unless expressly excluded. The demand was therefore unsustainable and consequential relief followed.

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Issues: (i) Whether a demand for reversal of credit could be raised after permission had earlier been granted under Rule 57H of the Central Excise Rules, 1944. (ii) Whether credit under Rule 57H of the Central Excise Rules, 1944 could be restricted only to the actual duty paid on inputs, or could extend to the notional higher credit available in respect of inputs received from small scale industrial units.

Issue (i): Whether a demand for reversal of credit could be raised after permission had earlier been granted under Rule 57H of the Central Excise Rules, 1944.

Analysis: The show cause notice was issued within six months of the grant of credit. Rule 57I of the Central Excise Rules, 1944 permitted such a demand. The subsequent demand, therefore, was treated as an authorised recovery action and not as an impermissible review of the earlier order.

Conclusion: The technical objection failed, and the demand could validly be raised.

Issue (ii): Whether credit under Rule 57H of the Central Excise Rules, 1944 could be restricted only to the actual duty paid on inputs, or could extend to the notional higher credit available in respect of inputs received from small scale industrial units.

Analysis: Rule 57H is a transitional provision intended to extend Modvat benefit to inputs lying in stock on the date of declaration under Rule 57G of the Central Excise Rules, 1944. Rule 57A of the Central Excise Rules, 1944 contemplates credit of duty on inputs, while Rule 57B of the Central Excise Rules, 1944 creates a deeming fiction for inputs received from small scale industrial units so that credit is available at the normal rate even where the actual duty paid is lower. Reading the scheme as a whole, and in the absence of any exclusion of Rule 57B, the phrase "duty paid on inputs" in Rule 57H was held to include the notional higher credit in such cases. The benefit already available prospectively could not be denied merely because the inputs were in stock on the declaration date.

Conclusion: Credit under Rule 57H was not confined to the actual duty paid and the notional higher credit was admissible for qualifying inputs from small scale industrial units.

Final Conclusion: The order confirming the demand was unsustainable and the assessee was entitled to the disputed Modvat credit with consequential relief.

Ratio Decidendi: A transitional Modvat provision extending credit to inputs lying in stock must be construed in harmony with the substantive credit scheme, and where a deeming fiction grants higher credit for specified inputs prospectively, that benefit applies to stock lying on the declaration date unless expressly excluded.

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