Modvat credit for inputs from 100% EOUs turns on comparing duty paid with additional customs duty on like imports.

Modvat credit on inputs received from a 100% Export Oriented Unit was to be determined under the first proviso to Notification No. 5/94-C.E. by comparing the additional customs duty leviable on like imported goods with the duty actually paid by the EOU. The Tribunal followed the Larger Bench view that duty paid by a 100% EOU on clearances into India is treated as excise duty and is not to be split into basic customs duty, auxiliary duty, or additional duty components. On that basis, credit was allowable within the proviso's limit, and the demand and penalty could not be sustained.

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Issues: Whether Modvat credit on inputs procured from a 100% Export Oriented Unit was restricted to the duty actually paid by the unit, or whether it was allowable up to the extent of the additional customs duty leviable on like imported goods.

Analysis: The dispute turned on the interpretation of the first proviso to Notification No. 5/94-C.E. and the manner in which duty paid by a 100% EOU is to be treated for credit purposes. The Tribunal applied the Larger Bench ruling which had held that the duty paid by a 100% EOU on goods cleared into India is to be regarded as excise duty and cannot be dissected into components of basic customs duty, auxiliary duty, or additional duty of customs. The correct approach is to compare the additional duty leviable on like imported goods with the actual duty paid by the 100% EOU and allow credit only up to the applicable limit under the proviso.

Conclusion: The appellants were entitled to the credit claimed, and the demand and penalty could not be sustained.

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