2012 (12) TMI 1117 - HC - Central Excise

Summary

Issues Involved:
1. Validity of Notification No. 14/1997-C.E. (N.T.), dated 3-5-1997.
2. Restriction of Modvat credit to 10% of the Excise duty.
3. Discriminatory treatment under Article 14 of the Constitution of India.

Summary:

1. Validity of Notification No. 14/1997-C.E. (N.T.), dated 3-5-1997:
The petitioners challenged the validity of Notification No. 14/1997-C.E. (N.T.), dated 3-5-1997, arguing that it was arbitrary, unreasonable, and ultra vires the Constitution. The notification restricted the Modvat credit to 10% of the excise duty for certain petroleum products. The petitioners also contested the vires of Section 87 of the Finance Act but did not press this challenge.

2. Restriction of Modvat credit to 10% of the Excise duty:
The petitioners sought a declaration that restricting the Modvat credit to 10% of the excise duty as provided in the notification was ultra vires the rule-making powers u/s 37(xvi) and (xvia) of the Central Excise Act, 1944. They argued that they were entitled to avail and utilize the accrued Modvat credit to the extent of the excise duty paid on inputs used, such as specified petroleum products, during the period from 23-7-1996 to 28-2-1999. The Government of India issued the notification dated 3-5-1997 to rectify the undue benefit manufacturers received by availing Modvat credit at 15% while actually bearing a duty incidence of only 10%.

3. Discriminatory treatment under Article 14 of the Constitution of India:
The petitioners argued that the notification was arbitrary and discriminatory, thus violative of Article 14 of the Constitution of India. They contended that they paid full excise duty at the rate of 15% on non-fertilizer items and should not have their Modvat entitlement curtailed. The court noted that the petitioners paid full duty of excise at 15% directly to the Government, unlike other manufacturers who paid only 10% and had the remaining 5% absorbed by the Oil Pool Account. The court referenced the decision in Gujarat Paraffins Pvt. Ltd. v. Joint Secretary to the Government of India, where a similar notification was struck down for being discriminatory.

The court concluded that the impugned notification violated Article 14 as it grouped together manufacturers who paid different rates of excise duty, treating them equally despite their unequal circumstances. The notification was declared illegal insofar as it limited the Modvat credit to 10% for those who paid the full 15% excise duty. The petitioners were entitled to a refund of duty with statutory interest.

Conclusion:
The petition challenging the notification was allowed, with the court declaring the restriction on Modvat credit to 10% as illegal for manufacturers who paid the full 15% excise duty. The petitioners were entitled to consequential benefits, including a refund of duty with interest.