Holding

Section 37 does not enable the Central Government to enact Rule 57F(4A); the rule cannot be applied to goods manufactured prior to 16‑03‑1995 where duty has been paid and credit utilised.

Summary

The petitioners, manufacturers including Eicher Motors Ltd., challenged Rule 57F(4A) of the Central Excise Rules, 1944 which mandated that MODVAT credit unutilised as on 16 March 1995 would lapse. They argued that the credit represented a vested right under the existing law and that Section 37 of the Central Excise Act, 1944 did not empower the Central Government to enact such a rule, making it ultra vires, arbitrary, and violative of promissory estoppel and legitimate expectation. The respondents contended that the rule was part of a permissible scheme of concessions and could be altered without affecting vested rights. The Supreme Court held that once duty on inputs had been paid and credit used for manufacturing, a right accrued that could not be taken away retrospectively, and that Section 37 does not authorize the rule. Consequently, the Court declared that Rule 57F(4A) cannot be applied to goods manufactured before 16‑03‑1995 and allowed the petitions.

Issues considered

Whether Section 37 of the Central Excise Act, 1944 empowers the Central Government to frame Rule 57F(4A) that lapses MODVAT credit unutilised as on 16 March 1995.
Whether the rule infringes a vested right accrued to assessees under the earlier MODVAT scheme.
Whether the rule is arbitrary, unreasonable, and violative of the doctrines of promissory estoppel or legitimate expectation.
Whether the rule can be applied retrospectively to goods manufactured before the specified date.

Legislation cited

Central Excise Act, 1944s. 37
Central Excise Rules, 1944s. Rule 57F(4A)
Central Excise Tariff Act, 1985

Subjects

MODVAT creditCentral ExciseRule 57F(4A)vested rightSection 37tax credit lapseultra virespromissory estoppellegitimate expectationretrospective application

Judgment

-"'" EICHER MOTORS LTD. AND ANR.
v.
A

UNION OF INDIA AND ORS. ETC.

JANUARY 28, 1999

[S.P.BHARUCHA, K. VENKATASWAMI AND B
S. RAJENDRA BABU, JJ.]

Central Excises and Salt Act, 1944-Section 37-Power of Central
Government to frame a scheme-Scope of-Explained.
c
Central Excise Rules, 1944--Rule 57-F(4A}-Applicability of-MOD-
VAT Credit lying balance with the assessee-Pursuant to amendment in Rule
57F, [read as 57F (4A)], credit lying unutilised on 16.3.1995 with manufac-
turers stood lapsed-Held, Rule 57-F (4A) cannot be applied to the goods
manufactured prior to 16.3.95 on which duty was paid and credit facility has
been availed for purpose of manufacture of further goods.
D

Modvat credit was lying in balance with the assessees as on
16.3.1995. Under existing law vested right accrued to the assessees allowing
the duty paid on inputs as credit for payment of excise duty on the final
products, in the manufacture of which such inputs were used. Thereafter, E
with modification to Rule 57F, now read as 57F(4A) the credit lying
unutilised on 16.03.1995 with the manufacturers stood lapsed.

In these petitions, challenging the validity and application of the
Rule 57F(4A) petitioner contended that Section 37 of the Central Excise
F
Act, 1944 does not enable the Central Government to frame a rule enabling
' the lapsing of the balance in MODVAT account. The MODVAT credit lying
in balance with the petitioners as on 16.3.1995, a vested right accrued to
them under existing law which is sought to be taken by the modified Rule
57F(4A).
G
The respondents submitted that the Rule 57F(4A) is only a part of
·-~
a scheme providing for giving concessions under the taxation enactment.
The scheme provided only for mode of adjustment of truces where no vested
right accrued to the petitioners. Further, the Rule makes it clear that there
shall be no credit by rationalising the duty structure and addition of any H
295
··- r:

296 SUPREME COURT REPORTS [1999] 1 S.C.R.
I
A input can be utilised upto particular point of time. Therefore, it was
permissible for. the authorities to frame Rule falling within scope of
Section 37 of the Act enabling the lapsing of MODVAT credit lying un-
utilised on 16.03.1995 with the Petitioners.

Allowing the· Petitions, this Court
B
HELD : 1. 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
produces as inputs thereto then the tax on these goods gets adjusted which
are finished subsequently. A right accrues to the assessees on the date
C 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 Rule 57F(4A) and this
rule cannot be applied to the goods manufactured prior to 16.3.1995 on
D which duty had been paid and cr~dit facility thereto has been availed of
for the purpose of manufacturer of further goods. [300-G-H; 301-A-B]

2. When on the strength of the rules available certain acts have been
done by the parties concerned, incidents following thereto must take place
E in accordance with the scheme under which the duty had been paid 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 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 tax is adjusted
on future goods on the basis of the several commitments which would have
F been made by the assessees concerned. Therefore, the scheme sought to be
introduced cannot be made applicable to the goods which had already come
into existence in respect of which the earlier scheme was applied under
which the assessees had availed facility for payment of taxes. It is on the
basis of the earlier scheme necessarily the taxes have to be adjusted and
payment made complete. Any manner or mode of application of the said
G rule would result in affecting the rights of the assessees. [300-D-F]

CIVIL ORIGINAL JURISDICTION: Transferred cases (C) Nos. 7
and 8 of 1998.

H Under Article 139A of the Constitution of India.
t

EICHER MOTORS LTD. v. U .0.1. [RAJENDRA BABU, J.) 297

A.K. Ganguli, V.A. Moht~, A.N. Haksar, Raju Ramachandran, A
Ashok Desai, Joseph Vellapelly, A. Subba Rao, K. Swamy, Dilip Tandon,
V.K. Verma, K.G. Bhagat, Vineet Bhagat, Debasis Misra, J.DJain, P.K.
Ram, D.N. Mishra, Joseph Pookkatt, Prashant Kumar, V. Sridharan, V.
Balachandran, R.Nambirajan, Pragyan Sharma, Tarun Gulati, Rajendra
Singhvi, Ashok Kr. Singh, Ms. Indu Malhotra, M.L. Lahoty, Paban Sharma,
Himanshu Shekhar, R. Anand Padmanabhan, Rajeev Kapoor, and Rakesh
B
K. Sharma, for the appearing parties.

The Judgment of the Court was delivered by

RAJENDRA BABU, J. In these petitions validity and application of C
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 un-
utilised on 16th March, 1995 with the manufacturers, stood lapsed in the
manner set out therein is questioned.

The relevant rule reads as follows : D
(4A) Notwithstanding anything contained in sub-rule ( 4), or sub-
rule (1) of rule 57A and the notifications issued thereunder any
credit of specified duty lying unutilised on the 16th day of March,
0 1995 with a manufacturer of tractors, falling under heading No.
87.01 or motor vehicles falling under heading No. 87.02 and 87.04 E
or chassis of such tractors or such motor vehicles under heading
No. 87.06 of the Schedule to the Central Excise Tariff Act, 1985
(5 of 1986) shall lapse and shall not be allowed to be utilised for
payment of duty on any excisable goods, whether cleared for home
consumption or for export :
F
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."

There are three assessees before us seeking for quashing of the said G
rule. The grounds in support of the challenge to the validity of the said rule
are as follows :

1. MODVAT credit lying in balance with the assessee as on
16.3.95 represents a vested right accrued or acquired by the
assessee under the existing law and such right is sought to be H
298 SUPREME COURT REPORTS [1999] 1 S.C.R.

A taken away by impugned Rule 57F(4A) and the Central
Government has no powers under Section 37 of the Central
Excise Act, 1944 [hereinafter referred to as 'the Act'] or any
other provision thereof to frame such a rule.

2. The impugned rule is arbitrary and unreasonable as the same
B has been framed without due application of mind to the
relevant facts and it has been exercised on the basis of
non-existent facts or which are patently erroneous.

3. Section 37 of the Act does not enable the Central Govern-
ment to frame a rule enabling the lapsing of the balance in
c 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.
D
On behalf of the respobdents it is submitted that impugned Rule
57F(4A) is only a part of a scheme providing for giving, concessions under
the taxation enactment. The scheme need not be continued for all time to
come and could be put to an end at any time and thus all that has happened
is that the scheme which was available earlier is no longer available and, o
E therefore, it is not open to contend that the scheme affects any vested right;
and, that under the scheme it is only a mode of adjustment of taxes which
were provided and there is no vested right accrued to the assessees. Thus
a rule which merely lapsed does not give rise to the· contention advanced
on behalf of the petitioners and the withdrawal of concessions at any rate
p is not retrospective in. effect to apply either the principle of promissory
estoppel and/or th~ doctrine of legitimate expectation or even the rule that
a vested right cannot be taken away. It is further made clear that a credit
facility which is made available could not be allowed to perpetuate and the
entire rule is in the form of a package and it makes it clear that there shall
be no credit by rationalising the duty structure making it clear that addition
G of any input can be utilised upto a particular point of time. Certain
anomalies were noticed in the implementation of the scheme inasmuch as,
if the benefit of concession had been extended, though on the original item
manufactured, a duty was liable to be paid and the ultimate product
remains a duty free product and thus led to a situation where on the item
H originally manufactured which was used as an input was paid only in order
EICHER MOTORS LTD. v. U.0.1. (RAJENDRA BABU, J.] 299

to avoid payment of duty on the ultimate goods manufactured by them. In A
the original scheme introduced there was a nexus between the input and
the output but the result of the application of that scheme led to a situation
where such nexus was lost between the input and the output leading to a
anomalous situation pointed out above. It is therefore, submitted that it
was permissible for the authorities to frame the rule in question which fell
within the scope of Section 37 of the Act.
B

Rule 57F(4A) was introduced into the Rules pursuant to Budget for
1995-96 providing for lapsing of credit lying unutilised on 16.3.95 with a
manufacturer of tractors falling under heading No. 87.01 or motor vehicles
falling under heading No. 87.02 and 87.04 or chassis of such tractors or C
such motor vehicles under heading No. 87.06. However, credit taken on
inputs which were lying in the factory on 16.3.95 either as parts or con-
tained in finished products lying in stock on 16.3.95 was allowed. Prior to
1995-96 Budget, central excise/additional duty of customs paid on inputs
was allowed as credit for payment of excise duty on the final products, in D
the manufacture of which such inputs were used. The condition required
for the same was that the credit of duty paid on inputs could have been
used for discharge of duty/liability only in respect of those final products
in the manufacture of which such inputs were used. Thus it was claimed
that there was a nexus between the inputs and the final products. In 1995-96
Budget MODVAT scheme was liberalised/simplified and the credit earned E
on any input was allowed to be utilised for payment of duty on any final
product manufactured within the same factory irrespective of whether such
inputs were used in its manufacture or not. The experience showed that
credit accrued on inputs is less than the duty liable to be paid on the final
products and thus the credit of duty earned on inputs gets fully utilised and F
some amount has to be paid by the manufacturer by way of cash. Prior to
1995-96 Budget, the excise duty on inputs used in the manufacture of
tractors, commercial vehicles varied from 15% to 25%, whereas· the fmal
products were attracted excise duty of 10% or 15% only. The value
addition was also not of such a magnitude that the excise duty required to
be paid on final products could have exceeded the total input credit G
allowed. Since the excess credit could not have been utilised for payment
of the excise duty on any other product, the unutilised credit was getting
accumulated. The stand of the assessees is that they have utilised the
facility of paying excise duty on the inputs and carried the credit towards
excise duty payable on the fmished products. For the purpose of utilisation H
300 SUPREME COURT REPORTS (1999) 1 S.C.R.

A of the credit all vestitive facts or necessary incidents thereto have taken
place prior to 16.3.95 or utilisation of the finished products prior to 16.3.95.
Thus the assessees became entitled to take the credit of the input instan-
taneously once the input is received in the factory on the basis of the
existing scheme. Now by application of Rule 57F(4A) credit attributable to
B inputs already used in the manufacture of the final products and the final
products which have already been cleared from the factory alone is sought
to be lapsed, that is, the amount that is sought to be lapsed relates to the ,_
inputs already used in the manufacture of the final products but the final
products have already been cleared from the factory before 16.3.95. Thus
the right to the credit has become absolute at any rate when the input is
C used in the manufacture of the final product. The basic postulate, that the
scheme is merely being altered and, therefore, does not have any retrospec-
tive or retro-active effect, submitted on behalf of the State, does not appeal
to us. As pointed out by us that when on the strength of the rules available
certain acts have been done by the parties concerned, incidents following
D thereto must take place in accordance with the scheme under which the
duty had been paid 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 tax is adjusted on future goods on the basis of the several
E commitments which would have been made by the assessees concerned.
Therefore, the scheme sought to be introduced cannot be made applicable
to the goods which had already come into existence in respect of which the
earlier scheme was applied under which the assessees had availed of the
credit facility for payment of taxes. It is on the basis of the earlier scheme
F necessarily the taxes have to be adjusted and payment made complete. Any
manner. or mode of application of the said rule would result in affecting
the rights of the assessees.

We may look at the matter from another angle. If on the inputs the
assessee had already paid the taxes on the basis that when the goods are
G 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,
H it becomes clear that Section 37 of the Act does not enable the authorities
EICHER MOTORS LTD. v. U.0.I. [RAJENDRA BABU, J.] 301
concerned to make a rule which is impugned herein and, therefore, we may A
- ..l
have no hesitation to hold that the rule cannot be applied to the goods
manufactured prior to 16.3.95 on which duty had been paid and credit
facility thereto has been availed of for the purpose of manufacture of
further goods.

There are several decisions referred to by the learned counsel on B
either side but we do not think that those decisions have any relevance to
the point under discussion.

We allow the petitions filed by the assessees and declare that the said
rule cannot be applied except in the manner indicated by us above. No
orders as to costs. c
NJ. Petitions allowed.