Reversal of input credit barred value-based demand on exempted goods; penalty was also reduced.

Where credit taken on inputs used in exempted goods had already been reversed, and the identity and quantity of those inputs were not disputed, a demand of 8% of the value of the exempted goods was held unsustainable. The demand was set aside. On penalty, a rule violation was accepted but the surrounding circumstances justified interference, so the penalty was reduced from Rs. 10,000 to Rs. 5,000. The impugned orders were modified accordingly, granting the assessee full relief on demand and partial relief on penalty.

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Issues: (i) Whether the demand of 8% of the value of exempted goods was sustainable after reversal of the credit taken on inputs used in such goods. (ii) Whether the penalty imposed required interference.

Issue (i): Whether the demand of 8% of the value of exempted goods was sustainable after reversal of the credit taken on inputs used in such goods.

Analysis: The credit taken on the motors used in the exempted goods had already been reversed. The identity and quantity of inputs used in the exempted goods were not in dispute. In these circumstances, the demand of 8% of the value of the exempted goods could not be sustained.

Conclusion: The demand was set aside in favour of the assessee.

Issue (ii): Whether the penalty imposed required interference.

Analysis: Though a rule violation was found, the overall circumstances justified reduction of the penalty.

Conclusion: The penalty was reduced from Rs. 10,000 to Rs. 5,000 in favour of the assessee.

Final Conclusion: The appeal succeeded on the demand issue and received partial relief on penalty, resulting in modification of the impugned orders.

Ratio Decidendi: Where credit taken on inputs used for exempted goods is reversed and the inputs are identifiable, a demand linked to the value of the exempted goods is not sustainable.

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