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2016 (7) TMI 1074 - DELHI HIGH COURT

2016 (7) TMI 1074 - DELHI HIGH COURT - 2016 (340) E.L.T. 643 (Del.) - Lapsing of credit of duty lying unutilised with the manufacturer from a specified date. - Held that:- It appears that in their wisdom, the Central Government sought to balance the rationalisation of duty structure and provide flexibility in the use of credit by lapsing the accumulated credit which was admittedly a product of the earlier duty structure. - Viewed from the aforesaid perspective, we are unable to hold that the .....

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ights guaranteed under the Constitution. - In the present case, we are unable to accept that the legislative policy in aid of which Rule 57F(4A) was made, is irrational or unreasonable. - Decided against the assessee. - W.P.(C) 4754/1995, W.P.(C) 1824/2000, & W.P.(C) 1826/2000 - Dated:- 22-7-2016 - S. MURALIDHAR & VIBHU BAKHRU JJ. Petitioners Through: Mr L. Badri Narayanan, Mr Aditya Bhattacharya & Mr Yogendra Aldak, Advocates. Respondents Through: Ms Meera Bhatia, Senior Standing co .....

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9, clause (xxviii) was introduced in Sub-section 2 of Section 37 of the Central Excise Act, 1944 (hereinafter referred as the Act), to specifically empower the Central Government to make rules to provide for the lapsing of credit of duty lying unutilised with the manufacturer from a specified date. 3. Section 132 (1) (a) and Section 132 (2) of the Finance Act, 1999 were enacted to validate Sub-rule (4A) of Rule 57F of the Central Excise Rules, 1944 (hereafter 'the Rules') which had been .....

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f duty on excisable finished goods. 4. The Petitioners in W.P.(C) No.4754/1995 inter alia impugn the validity of Sub-rule (4A) of Rule 57F and seek an appropriate writ declaring the said Sub-rule to be ultra vires the Constitution of India. Factual context 5. M/s SML Isuzu Limited and M/s V E Commercial Vehicles Limited (hereafter referred to as 'the Petitioners') are mainly engaged in the manufacturing of chassis for light commercial vehicles (hereafter 'LCVs') falling under sub .....

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them. In terms of the MODVAT scheme, the Petitioners have been availing credit in respect of the duty paid by them on inputs for discharge of the Excise Duty payable on the finished products since 1986. It is stated that in 1993, the Excise Duty payable on the goods manufactured by the Petitioners was reduced from 20% to 15% but the duty chargeable on the parts used in manufacture of those goods was increased to 20% to 25%. In view of this duty structure, the Petitioners were unable to fully ut .....

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id Rule 57F(4A) of the Rules. 7. The denial of credit for the duties paid by Petitioners is at the core of the disputes involved in these petitions. It is claimed that SML Isuzu Limited and VE Commercial Vehicles Limited were denied the benefit of accumulated credit of ₹ 4.88 Crores and ₹ 8.21 Crores respectively; they, accordingly, claim refund of the said amounts. Submissions 8. Mr. L. Badri Narayanan, learned counsel for the Petitioners, submitted that the effect of the impugned p .....

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ort to such legislation in cases where the Assessees had acted in accordance with rules. He referred to the opinion of Justice Sen in Lohia Machines Limited v. Union of India (1985) 2 SCC 197, wherein it has been held that the retrospective application of Section 80J of the Income Tax Act, 1957 would be invalid. MODVAT Scheme 9. On the presentation of the Annual Budget 1986-87 in the Lok Sabha on 28.02.1986, the then Finance Minister referred to the Modified Value Added Tax‟ MODVAT Scheme- .....

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ble to a manufacturer in respect of Excise Duty as well as Additional Duties of Customs (known as Countervailing Duty) for payment of the Excise Duty on finished products. The said scheme came into force on 01.03.1986. 10. Section AA of Chapter V of the Rules contain Rules 57A to 57E embodying the statutory framework of the MODVAT Scheme. 11. The circular dated 08.08.1988 reported in 1988 (37) ELT T-17 clarified that the accumulated credit of duties paid on inputs could also be utilised for paym .....

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sation of excess (accumulated because of less duty on final products than on the Input's) for payment of duty on the same final products which are manufactured by non-duty paid inputs (whether procured under Chapter X procedure or otherwise exempt under any notification). Moreover, there is no 'one to one co-relation of inputs and final product under the MODVAT scheme for utilisation of credit. It has therefore been decided by the Board that the excess credit accumulated if any, can be u .....

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any one to one corelation between the inputs used and the final product manufactured? Answer: The MODVAT scheme provides for instant credit. The credit of the duty paid on the inputs can be taken as soon as the inputs are received and the evidence of payment of duty is in hand and the same may be utilised immediately for payment of duty on the final products for the manufacture of which such inputs are intended to be utilised. There need not be any one to one co-relation between the input and th .....

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in respect of final products which are exported under bond can also be utilised similarly. 13. In terms of Rule 57G (2) of the Rules, the Petitioners are entitled to the credit of duties paid on the inputs immediately on the receipt of such inputs in the factory. It is not disputed that the excise duty structure of goods used as inputs for manufacturing the final product was always less than the excise duty payable on the final product. However, for a period of three years commencing from 1993 - .....

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sequently, the manufacturers were unable to utilise the MODVAT credit in respect of specified duties paid on the inputs, for paying the duty on final product. 14. Admittedly, prior to the year 1995, the credit in respect of duty paid on any input could only be utilised for payment of excise duty on the finished product which were manufactured by use of such inputs. In 199596, the Government of India provided for liberalisation of the use of credit on account of duties paid on any inputs used for .....

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ame time, the excise duty structure was rationalised and Government of India also decided to lapse the un-utilised MODVAT credit other than the credit in respect of duties on inputs which were physically lying in the factory premises either as raw material or as incorporated in the finished products. 15. Accordingly by a notification No.11/95 CE(NT) dated 16.03.1995, sub Rule 4A was introduced in Rule 57F of the Rules which reads as under:- 57-F. (4-A) Notwithstanding anything contained in subru .....

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ny excisable goods, whether cleared for home consumption or for export: Provided that nothing contained in this sub-rule shall apply to credit of duty, if any, in respect of inputs lying in stock or contained in finished products lying in stock on the 16th day of March, 1995. The decision of the Supreme Court in Eicher Motors Pvt. Ltd. 16. The validity of Rule 57F(4A) of the Rules was challenged before the Supreme Court, inter alia, on the following grounds:- 1. Modvat credit lying in balance wi .....

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acts and it has been exercised on the basis of nonexistent facts or which are patently erroneous. 3. Section 37 of the Act does not enable the Central Government to frame a rule enabling the lapsing of the balance in Modvat account and is therefore ultra vires the rule making power. 4. The rule is vitiated on the grounds of promissory estoppel and/or the doctrine of legitimate expectation. 17. The Assessees, that is, the Petitioners therein contended that they had utilised the facility of the sc .....

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o frame Rules for such scheme would also include the power to vary or modify the scheme. 18. The Supreme Court held that for the purpose of utilisation of the credit, all vestitive facts or necessary incidents thereto had taken place prior to 16th March, 1995. The duty paid inputs had been utilised in manufacturing finished products which had been cleared thereafter. The Court observed that under the MODVAT scheme, the Assessees became entitled to credit of the input instantaneously on the input .....

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id on the manufactured products and if such a situation is sought to be altered, necessarily it follows that right, which had accrued to a party such as availability of a scheme, is affected and, in particular, it loses sight of the fact that provision for facility of credit is as good as tax paid till taxis adjusted on future goods on the basis of the several commitments which would have been made by the assessees concerned. Therefore, the scheme sought to be introduced cannot be made applicabl .....

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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 .....

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d MODVAT credit in respect of the goods falling under the specified headings. 20. By virtue of clause (b) of Section 131 of the Finance Act, Sub clause (xxviii) was introduced in Sub-section 2 of Section 37 of the Act. The said provision reads as under:- 131.Amendment of section 37. - In section 37 of the Central Excise Act, in sub-section (2), - (a) xxxx xxxx xxxx xxxx (b) after sub-clause (xxvii), the following sub-clause shall be inserted and shall be deemed to have been inserted with effect .....

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le shall be deemed to have and to have always had effect from 16th March, 1995. Sub-section 2 of Section 132 was enacted to validate all actions taken pursuant to introduction of Sub-rule 4A in Rule 57F of the Rules. The said provisions impugned in these petitions and are set out below:- 132. Validation of certain rules. - (1) In the Central Excise Rules, 1944, made by the Central Government in exercise of the powers conferred under section 37 of the Central Excise Act, in rule 57F, - (a) sub-ru .....

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any rules made thereunder in relation to the lapsing of credit of duty lying unutilised with the manufacturer of specified excisable goods and also for not allowing such credit to be utilised for payment of any kind of duty on any excisable goods shall be deemed to be, and to always have been, for all purposes, as validly and effectively taken or done as if the amendments made by sub-section (1) had been in force at all material times and, accordingly, notwithstanding anything contained in any j .....

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r continued in any court for allowing the credit of, and no enforcement shall be made by any court of any decree or order allowing the credit of duty which has been lapsed and not allowed to be utilised and which would have been validly lapsed and not allowed to be utilised if the amendments made by sub-section (1) had been in force at all material times; (c) recovery shall be made of all the credit of duty, which have not been lapsed or, as the case may be, which have been taken or utilised but .....

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ayable, from the date immediately after the expiry of the said period of thirty days till the date of payment. Explanation.-. For the removal of doubts, it is hereby declared that no act or omission on the part of any person shall be punishable as an offence which would not have been so punishable if this section had not come into force. Reasoning and Conclusion 22. As is apparent from the above, the Parliament enacted Rule 57F(4A) to be in effect from 16th March, 1995. Sub-section (2) of Sectio .....

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cise duty. The said sub clause also provides for charging interest at the rate of 36% per annum for a period commencing after expiry of 30 days from the enactment till the date of payment. 23. There are two aspects to the challenge laid by the Petitioners to the impugned provisions of the Finance Act, 1999. The first aspect relates to the validity of retrospectively affirming Rule 57F(4A) of the Rules which had been held to be beyond the scope of Section 37 of the Act by the Supreme Court in Eic .....

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empowered to frame any subordinate legislation for taking away the said accrued rights. Indisputably, the said defect has been cured inasmuch as the Parliament has by Section 131 of the Finance Act, 1999 specifically empowered the Central Government to frame Rules for lapsing of accumulated credit on a specified date. Thus, if we assume - for the purposes of considering the challenge to the retrospective affirmation of Rule 57F(4A) of the Rules - that there was no defect in Rule 57F(4A) at the t .....

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slation. It is well established that to legislate on the object within the field of the legislative competence and to enforce the legislative policy - including by way of a retrospective legislation - is a perfectly permissible exercise of legislative power. 25. In Rai Ramkrishna v. The State of Bihar: (1963) 50 ITR 171 (SC), the Supreme Court considered the challenge to the validation of the retrospective operation of the Bihar Taxation on Passengers and Goods (Carried by Public Service Motor V .....

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text of the challenge to the retrospective operation of the law, the Court observed as under:- The other point on which there is no dispute before us is that the legislative power conferred on the appropriate legislatures to enact law in respect of topics covered by the several entries in the three Lists can be exercised both prospectively and retrospectively. Where the legislature can make a valid law, it may provide not only for the prospective operation of the material provisions of the said .....

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the said earlier law effective from the date when it was passed. This position is treated as firmly established since the decision of the Federal Court in the case of The United Provinces v. Mst. Atiqa Begum : (1940) F.C.R. 110. 26. In Virender Singh Hooda v. State of Haryana: (2004) 12 SCC 588, the Supreme Court observed: It is well settled that if the legislature has the power over the subject-matter and competence to make a valid law, it can at any time make such a valid law and make it retr .....

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n by the Courts. It is now well established that the legislature can frame laws retrospectively within the field of their legislative competence. It is also well established that validating acts which cure the defect that invalidated an earlier legislation cannot be impugned as being unreasonable solely on the ground of their retrospective operation (except, of course, where the period of retrospective operation is itself unreasonable and unjustified). 28. In R.C. Tobacco Pvt. Ltd. v. Union of I .....

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a fiscal statute would have to be found to be unduly oppressive and confiscatory before it can be held to be so unreasonable as to violate constitutional norms: Where for instance, it appears that the taxing statute is plainly discriminatory or provides no procedural machinery for assessment and levy of the tax, or that it is confiscatory, courts would be justified in striking down the impugned statute as unconstitutional. In such cases, the character of the material provisions of the impugned .....

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ent to be valid must however be reasonable and not arbitrary and must not be violative of any of the fundamental rights guaranteed under the Constitution. The mere fact that any statutory provision has been amended with retrospective effect does not by itself make the amendment unreasonable. Unreasonableness or arbitrariness of any such amendment with retrospective effect has necessarily to be judged on the merits of the amendment in the light of the facts and circumstances under which such amen .....

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challenge to the validity of the Gujarat Imposition of Taxes by Municipalities (Validation) Act, 1963. The said enactment was impugned as being ultra vires Article 19(1)(f), 19(1)(g) and 265 of the Constitution of India. The said challenge arose in the context of rates imposed by Broach Borough Municipality (hereafter 'BBM') constituted under Section 8 of the Bombay Municipal Boroughs Act, 1925. BBM purporting to Act under Section 73 of the Bombay Municipal Boroughs Act, 1925 and the Rul .....

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dation Act was passed because the Supreme Court in Patel Gordhandas Hargovindas v. Municipal Commissioner, Ahmedabad: (1964) 2 S.C.R. 608 had interpreted Section 73 of the Bombay Municipal Boroughs Act, 1925 as not contemplating levy of rates based on the capital value of the lands and buildings and accordingly had struck down Rule 350A - which provided for rate on land at a percentage of the capital value of the property - as ultra vires the Bombay Municipal Boroughs Act, 1925. In the aforesaid .....

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islature must possess the power to impose the tax, for, if it does not, the action must ever remain ineffective and illegal. Granted legislative competence, it is not sufficient to declare merely that the decision of the Court shall not bind for that is tantamount to reversing the decision in exercise of judicial power which the legislature does not possess or exercise. A court's decision must always bind unless the conditions on which it is based are so fundamentally altered that the decisi .....

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had not been properly invested before. Sometimes this is done by re-enacting retrospectively a valid and legal taxing provision and then by fiction making the tax already collected to stand under the re-enacted law. Sometimes the legislature gives its own meaning and interpretation of the law under which the tax was collected and by legislative fiat makes the new meaning binding upon courts. The legislature may follow any one method or all of them and while it does so it may neutralise the effe .....

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the legislature possesses the competence which it claims over the subject-matter and whether in making the validation it removes the defect which the courts had found in the existing law and makes adequate provisions in the Validating law for a valid imposition of the tax. After observing as above, the Supreme Court rejected the challenge to the validity of Bombay Municipal Boroughs Act, 1925 in the following manner:- The legislature in Section 73 had not authorised the levy of a tax in this man .....

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9; so as to equate it to a tax on capital value and convert the tax purported to be collected as a 'rate' into a tax on lands and buildings. The legislature in the Validation Act, therefore, provided for the following matters. First, it stated that no tax or rate by whichever name called and laid on the capital value of lands and buildings must be deemed to be invalidly assessed, imposed, collected or recovered simply on the ground that a rate is based on the annual letting value. Next i .....

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tent. The legislature not only equated the tax collected to a tax on lands and buildings, which it had the power to levy, but also to a rate giving a new meaning to the expression 'rate', and while doing so it put out of action the effect of the decisions of the courts to the contrary. The exercise of power by the legislature was valid because the legislature does possess the power to levy a tax on lands and buildings based on capital value thereof and in validating the levy on that basi .....

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above case are in one sense materially similar to the facts in the present case as in the present case also, the Supreme Court had earlier held Rule 57F(4A) to be beyond the rule making power of the Central Government as conferred under Section 37 of the Act. 31. As pointed out earlier, by virtue of Section 131(b) of the Finance Act, 1999, the Parliament had cured the defect on account of which Rule 57F(4A) had been read down. There is no dispute as to the legislative competence of the Parliame .....

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ing violative of Article 14, 19(1)(f) and 19(1)(g), of the Constitution of India. According to the Petitioners, Rule 57F(4A) offends the rights guaranteed under Part III of the Constitution of India, as the said Rule is arbitrary and unreasonable. A plain reading of Rule 57F(4A) indicates that the operation of the said Rule is inherently retrospective inasmuch as its effect is to lapse MODVAT credit which has been accumulated by the Petitioners on account of payment of Excise Duty in respect of .....

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credit was as good as tax paid till the same was adjusted on future goods. In the aforesaid view, the central issue to be addressed is whether Rule 57F(4A) in view of its inherently retrospective effect renders the same unconstitutional. 33. It is now well established that tax legislations - like any other legislation are not immune from being assailed on the ground of being unreasonable and offending Article 14, 19(1)(f) and 19(1)(g) of the Constitution. The Supreme Court in the case of Tata Mo .....

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duce one set of rules for one period and another set of rules for another period by amending the laws in such a manner as to withdraw the benefit that had been given earlier resulting in higher burdens so far as the assessee is concerned without any reason. Retrospective withdrawal of the benefit of set-off only for a particular period should be justified on some tangible and rational ground, when challenged on the ground of unconstitutionality..... 34. Thus, while it is recognised that the powe .....

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(supra). In that case, the Supreme Court considered the challenge to a legislative amendment to Section 80J of the Income Tax Act, 1961. The majority opinion was that the amendment was only clarificatory and, therefore, was held to be valid. However, Justice Sen was of the view that the amendment was not clarificatory and the introduction of Sub section (1A) in Section 80J had the effect of retrospectively withdrawing the benefit granted under Section 80J in certain cases. As rightly pointed out .....

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e Bombay High Court in Commissioner of Income Tax v. Hico Products Pvt. Ltd.: (1991) 187 ITR 517 (Bom) have followed Justice Sen's view in regard to the effect of withdrawal of benefit with retrospective effect. In his dissenting opinion, Justice Sen held as under:- The withdrawal with retrospective effect of any relief granted by a valid statutory provision to an assessee, depriving the assessee of the benefit of the relief vested in the assessee, stands on a footing entirely different from .....

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the assessee of the vested statutory right has the effect of imposing a levy with retrospective effect for the years for which there was no such levy and cannot, unless there be strong and exceptional circumstances justifying such withdrawal or modification, be held to be reasonable or in public interest. 36. Retrospective statutory amendments made to cure certain defects and to validate a law held to be invalid or retrospective amendments which are clarificatory in nature, stand on a completel .....

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. A similar view was expressed by the Calcutta High Court in Shew Bhagwan Goenka v. Commercial Tax Officer.: (1973) 32 STC 368 (Cal) wherein the Court after referring to the various decisions of the Supreme Court including Rai Ramkrishna (supra) observed as under:- Different considerations may arise where by an amendment with retrospective operation a fresh tax is sought to be levied....... It is necessary, therefore, to enquire as to the circumstances under which the amendment in question was i .....

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levy with retrospective effect or to take away a benefit granted under an earlier law, the same is required to be justified on rational reasons. 38. The question whether an enactment is reasonable has to be considered in the context of the relevant statute and the purpose for which it has been enacted. As held by the Calcutta High Court in Shew Bhagwan Goenka (supra), no abstract standard or general pattern of reasonableness can be laid down as applicable to all cases. 39. In State of Madras v. .....

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as a part of rationalizing the Excise Duty structure. It is important to note that the Excise Duty structure existing prior to 1996 had resulted in the manufacturer paying a higher rate of excise duty on inputs as compared to the finished products; the duties payable on inputs was ranging from 20 to 25% while that of the finished product was 10 to 15%. The aforesaid duty structure coupled with the fact that manufacturing of the LCVs did not result in sufficient value addition to absorb the dutie .....

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s were not available for discharge of Excise Duties on any other product other than the finished goods manufactured by use of the inputs in question. Although, it is not necessary that the duty paid on inputs in respect of which credit was claimed had to be used for discharging the duty on the very same finished product in respect of which the input was actually used; nonetheless, credit for discharge of the liability in respect of the finished goods was available only in respect of such goods t .....

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not of a kind that required the very same input to be used in the final product. It was clarified by the department in that sense that there was no one to one co-relation between duty paid on the inputs and the output. However, it was also clear that the duty paid on inputs was not available as a credit in respect of duties on any other excisable finished product. If this restriction was continued and the duty structure was not rationalised for higher duties (in absolute terms) then the duties .....

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A) was an integral part of this rationalisation. One limb of the rationalisation was to reduce the duties paid on the finished product; this would ensure that the duties paid on inputs would be fully absorbed towards duties on the finished product. The second limb was to provide flexibility in use of the MODVAT credit available on account of payment of duties on raw material/input; such duties could now be used towards discharge of finished products other than those in respect of which such raw .....

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ed credit to further reduce the collection of revenues. 42. It appears that in their wisdom, the Central Government sought to balance the rationalisation of duty structure and provide flexibility in the use of credit by lapsing the accumulated credit which was admittedly a product of the earlier duty structure. 43. Viewed from the aforesaid perspective, we are unable to hold that the making of Rule 57F(4A) was so irrational or unreasonable as to fall foul of the Constitution of India. As to how, .....

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icy in aid of which Rule 57F(4A) was made, is irrational or unreasonable. The fact that the Petitioners would have to bear additional burden can clearly not be a ground to challenge the legislative policy. In J.K. Jute Mills Co. Ltd. v. The State of Uttar Pradesh: AIR 1961 SC 1534, the Supreme Court had unequivocally held as under : "And then it is argued that a sales tax being an indirect tax, the seller who pays that tax has the right to pass it on to the consumer, that a law which impose .....

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orising and regulating the collection of sales tax by the seller from the purchaser are a usual feature of sales tax legislation. But it is not an essential characteristics of a sales tax that the seller must have the right to pass it on to the consumer, nor is the power of the legislature to impose a tax on sales conditional on its making a provision for sellers to collect the tax from the purchasers. Whether a law should be enacted, imposing a sales tax, or validating the imposition of sales t .....

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