The Madras High Court has held that additional excise duty paid on inputs during the disputed 1998–99 period could not be utilised to discharge basic excise duty on tyres under the applicable MODVAT provisions. Allowing the department’s appeals against MRF Limited, the court set aside the Customs, Excise and Service Tax Appellate Tribunal’s order granting relief to the manufacturer, including a refund of ₹1,03,44,539.
The division bench of Justice G. Jayachandran and Justice N. Mala ruled that Rule 57C of the Central Excise Rules, 1944, read with Notification No. 5/94-CE(NT) dated March 1, 1994, restricted the use of Additional Excise Duty on Goods of Special Importance, or AED(GSI), credit to payment of duty under the same additional excise duty legislation.
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MRF manufactures tyres, tubes and flaps falling under Chapter 40 of the Central Excise Tariff. Its manufacturing process involves using unprocessed grey nylon tyre cord fabric to produce dipped or rubberised tyre cord wrap sheets, which are subsequently used in making tyres.
The unprocessed fabric attracted AED(GSI) under the Additional Duties of Excise (Goods of Special Importance) Act, 1957. The processed tyre cord wrap sheets were exempted from that duty under Notification No. 11/1998-CE dated June 2, 1998, subject to its conditions. The finished tyres attracted basic excise duty.
MRF availed AED(GSI) credit of ₹1,02,38,707 for June to October 1998 and another ₹1,07,62,274 for November 1, 1998, to March 31, 1999. It also submitted five refund claims totalling ₹1,03,44,539 relating to additional duty paid on inputs used in manufacturing tyres that were ultimately exported.
The department issued show cause notices challenging the credit. Through adjudication orders passed in February and October 1999, the Assistant Commissioner disallowed the disputed credit and rejected the refund claims. The Commissioner (Appeals) upheld those decisions.
MRF subsequently succeeded before CESTAT, which allowed its appeals through a common order dated November 25, 2003. The Revenue challenged that decision before the High Court.
The appeals raised two substantial questions of law: whether AED(GSI) credit on inputs was available when the final product was exempt from that additional duty, and whether the tribunal could grant the ₹1.03 crore refund under Rule 57F(13) when eligibility for the underlying credit was disputed.
MRF argued that tyres, rather than the intermediate tyre cord wrap sheets, were its final products. Since tyres were subject to basic excise duty, it maintained that Rule 57C’s restriction concerning exempt final products did not apply.
The manufacturer further submitted that the exported tyres satisfied the requirements for refund under Rule 57F(13). It also relied on subsequent changes to the CENVAT framework and provisions of the CGST Act to support its claim for re-credit or refund.
The Revenue contended that the tribunal had overlooked the specific restriction governing AED(GSI) credit. It argued that later notifications and circulars could not create an entitlement for the earlier disputed period.
The High Court accepted the department’s interpretation of the provisions applicable during the disputed period.
It explained that the second proviso to Notification No. 5/94 restricted utilisation of the relevant additional excise duty credit to payment of duty leviable under the AED(GSI) Act on the final products or, where permitted under Rule 57F, on the inputs themselves.
The bench therefore held that payment of basic excise duty on tyres did not, by itself, permit AED(GSI) credit on the fabric to be used against that liability.
The court noted that the tyre cord wrap sheets were exempt from AED(GSI), while tyres were not chargeable to duty under that legislation. Consequently, treating tyres as the final product did not overcome the restriction governing the particular duty credit claimed.
Discussing the purpose of MODVAT, the bench observed that the scheme sought to prevent the cascading effect of duty at successive manufacturing stages. However, credit remained subject to the applicable rules and notification. For the credit claimed in this case, the court required a nexus with the final product’s liability under the AED(GSI) Act. M:s.Mrf Ltd.
The bench rejected reliance on subsequent CENVAT changes to establish entitlement for the earlier period.
It held that the subsequent notification and circular discussed in its reasoning could not be given retrospective effect to confer a fresh right where the law governing the 1998–99 period restricted utilisation of AED(GSI) credit.
Addressing Section 88 of the Finance Act, 2004, the court examined the amendment to the explanation under Rule 3(6)(b) of the CENVAT Credit Rules, 2002.
The amended explanation permitted credit of AED(GSI) paid on or after April 1, 2000, to be utilised towards excise duty under the First or Second Schedule to the Central Excise Tariff Act. The duty involved in MRF’s appeals had been levied and paid before that cutoff.
The court therefore held that the amendment did not apply to the disputed claims.
It also declined to expand the controversy by reference to subsequent developments under the GST regime. The bench decided the appeals under the rules and notifications governing the relevant period, observing that references to later legal developments did not alter the underlying dispute.
Having held that MRF was not entitled to the disputed AED(GSI) credit or its utilisation towards basic excise duty, the High Court rejected the consequential refund claim under Rule 57F(13).
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