Proforma credit and Modvat transfer must follow statutory adjustment rules; later duty differentials go through PLA, not a closed account.
Where duty on inputs is varied after earlier credit has already been allowed, the statutory scheme requires adjustment in the credit account or account-current, and if that is not possible, recovery or refund in cash. Once the proforma account is closed and the Modvat declaration has been filed, the later differential duty cannot be routed through the closed proforma account merely to enable transfer. The transfer mechanism applies only to credit lying unutilised immediately before the relevant declaration. The substantive credit entitlement, however, remains available through PLA adjustment with a corresponding debit in the Modvat account.
Issues: (i) Whether credit could be taken in the proforma account in respect of differential duty paid subsequently on inputs received during the earlier period and initially credited on the basis of gate pass particulars. (ii) Whether transfer of that credit from the proforma account to the Modvat account was legally sustainable.
Issue (i): Whether credit could be taken in the proforma account in respect of differential duty paid subsequently on inputs received during the earlier period and initially credited on the basis of gate pass particulars.
Analysis: The relevant proviso to Rule 56A(2) contemplated a situation where duty initially paid on inputs, after credit had been allowed, was later varied by refund or recovery of additional duty. In such a case, the credit already allowed had to be varied by adjustment in the credit account, or in the account-current, or, if adjustment was not possible, by cash recovery or refund. Since the proforma account had already been closed and the Modvat declaration had been filed, the subsequent differential duty could not be routed through the closed proforma account. The proper course was adjustment through the account-current.
Conclusion: Credit for the differential duty could not be taken in the proforma account, but the assessee was entitled to equivalent credit in the PLA.
Issue (ii): Whether transfer of that credit from the proforma account to the Modvat account was legally sustainable.
Analysis: Rule 56A(9) barred simultaneous enjoyment of proforma credit and Modvat credit, and the transfer mechanism under Rule 57H applied only to credit lying unutilised immediately before the acknowledged Rule 57G declaration. The differential duty payment arose later, after the Modvat declaration and after closure of the proforma account. The transfer order was therefore technically inconsistent with the rule. However, the substantive entitlement to credit was not lost because the statute itself provided for adjustment in the PLA where direct adjustment in the proforma account was not possible.
Conclusion: The transfer to Modvat account was not sustainable in the form adopted, but the assessee remained entitled to the credit through PLA adjustment.
Final Conclusion: The assessee's substantive entitlement to the differential duty credit was upheld, and the authorities were directed to grant the credit in PLA with a corresponding debit in the Modvat account.
Ratio Decidendi: Where duty on inputs is varied after an earlier credit has been allowed and the proforma account has been closed, the statutory scheme requires adjustment in the account-current or, failing that, refund or recovery; the credit cannot be routed through a closed proforma account merely to enable transfer to Modvat.