Modvat credit on input yarn could be used for duty on dyed yarn; condition 15C(b) did not bar utilisation.

Condition 15C(b) of Notification No. 4/97 was construed as limiting credit only where it was relatable to inputs or capital goods used in the dyeing, printing, bleaching or mercerising process itself. Modvat credit taken on partially oriented yarn and accumulated in RG 23A Part II, having already been used for manufacture of textured yarn as an intermediate product, was not shown to have been taken on inputs used in the dyeing process. Rule 57F(12)(a) was read as permitting utilisation of credit for payment of duty on any final product, and the scheme did not bar use of unutilised credit across more than one final or intermediate product. On that interpretation, the demand was unsustainable.

---

---

Issues: Whether Modvat credit taken on Partially Oriented Yarn and accumulated in the RG 23A Part II account could be utilised for payment of duty on dyed yarn manufactured out of textured yarn, and whether condition 15C(b) of Notification No. 4/97, as amended, barred such utilisation.

Analysis: The condition in question was construed as restricting availing of credit only in the process of dyeing, printing, bleaching or mercerising, that is, credit relatable to inputs or capital goods used in that process. The credit in the present case was taken on the original input POY and had already been used in the manufacture of textured yarn, an intermediate product. No credit was shown to have been taken on inputs used in the dyeing process itself. Rule 57F(12)(a) was also read as permitting utilisation of credit for payment of duty on any final product, and the scheme did not bar utilisation of unutilised credit on more than one final or intermediate product. Where two views were possible on a fiscal provision, the interpretation favourable to the assessee was preferred.

Conclusion: The restriction in condition 15C(b) did not prohibit utilisation of the accumulated Modvat credit on POY for payment of duty on dyed yarn, and the demand was unsustainable.

---