1999 (1) TMI 34 - SC - Central Excise

Validity and application of the Scheme, as modified by introduction to Rule 57F read as 57F(4A) of the Central Excise Rules, 1944, under which credit which was lying unutilised on 16th March, 1995 with the manufacturers, stood lapsed in the manner set out therein Held that - If on the inputs the assessee had already paid the taxes on the basis that when the goods are utilised in the manufacture of further products as inputs thereto then the tax on these goods gets adjusted which are finished subsequently. Thus a right accrued to the assessee on the date when they paid the tax on the raw materials or the inputs and that right would continue until the facility available thereto gets worked out or until those goods existed. Therefore, it becomes clear that Section 37 of the Act does not enable the authorities concerned to make a rule which is impugned herein and, therefore, we may have no hesitation to hold that the rule cannot be applied to the goods manufactured prior to 16-3-1995 on which duty had been paid and credit facility thereto has been availed of for the purpose of manufacture of further goods. Allow the petitions filed by the assessees and declare that the said rule cannot be applied except in the manner indicated by us .

Summary

Issues:
Validity and application of the Scheme modified by Rule 57F(4A) of the Central Excise Rules, 1944.

Analysis:

1. Challenge to Validity of Rule 57F(4A):
Three assessees sought to quash Rule 57F(4A) on various grounds. They argued that the credit of specified duty lying unutilised on 16th March, 1995, represented a vested right accrued under existing law, and the rule sought to take away this right without proper authority. They contended that the rule was arbitrary, unreasonable, and ultra vires the rule-making power under Section 37 of the Central Excise Act, 1944. Additionally, they raised issues of promissory estoppel and legitimate expectation.

2. Respondents' Submission:
The respondents argued that the impugned rule was part of a scheme providing tax concessions, which could be modified or ended at any time. They claimed that the scheme did not confer any vested right to the assessees, as it was a mode of tax adjustment and not a permanent entitlement. The authorities justified the rule by pointing out anomalies in the scheme's implementation, where the nexus between input and output was lost, leading to unintended consequences.

3. Background and Implementation of Rule 57F(4A):
Rule 57F(4A) was introduced in the Central Excise Rules following the 1995-96 Budget, leading to lapsing of unutilised credit with manufacturers of specific vehicles. Prior to this, the Modvat scheme allowed credit on inputs used in manufacturing final products, with a nexus between inputs and outputs. However, the liberalization of the scheme in 1995-96 allowed broader use of credit, leading to accumulation of unutilised credit due to mismatch in duty rates on inputs and final products.

4. Court's Decision:
The Court held that the rule lapsed credit related to inputs already used in manufacturing final products that were cleared before 16th March 1995. It emphasized that the scheme's alteration could not have a retrospective effect on vested rights accrued under the earlier scheme. The Court found that the rule could not be applied to goods manufactured before 16th March 1995, on which duty had been paid and credit facility availed. The judgment declared that Rule 57F(4A) could not be applied except in specific circumstances outlined by the Court.

5. Conclusion:
The Court's decision favored the assessees, emphasizing the protection of vested rights accrued under the previous scheme and rejecting the retrospective application of the modified rule. The judgment clarified the limitations of the rule-making power and upheld the principle that alterations to tax schemes should not unjustly affect rights acquired by taxpayers under the previous regime.