Cenvat credit on fuel used for wholly exempt clearances was denied, while limitation extension and penalty failed for lack of suppression.

Cenvat credit on Light Diesel Oil and Furnace Oil used as fuel was not admissible when the manufacturer cleared its final products wholly exempt and did not produce any dutiable goods alongside the exempt goods, so Rule 57AD did not permit the claimed credit. The disclosed credit position in declarations and monthly returns showed no suppression of material facts, so the extended period of limitation could not be invoked and penalty was unsustainable. The demand was therefore to be recomputed by excluding the time-barred portion, and the penalty was set aside.

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Issues: (i) Whether Cenvat credit of duty paid on Light Diesel Oil and Furnace Oil used as fuel was admissible during the period when the final products were cleared under full exemption. (ii) Whether the extended period of limitation was invocable and penalty sustainable.

Issue (i): Whether Cenvat credit of duty paid on Light Diesel Oil and Furnace Oil used as fuel was admissible during the period when the final products were cleared under full exemption.

Analysis: Rule 57AD(1) barred credit on inputs used in exempted goods, subject to the exception in sub-rule (2). The exception applied where a manufacturer produced both dutiable and exempted goods and, in respect of inputs other than fuel, either maintained separate accounts or complied with the prescribed payment mechanism. The appellants, during the exemption period, did not manufacture any other dutiable final product and cleared their goods wholly exempt up to the notified limit. On those facts, they did not fall within the circumstances contemplated by sub-rule (2). The fuel exception did not extend to grant credit in the manner claimed.

Conclusion: Cenvat credit on LDO and Furnace Oil was not admissible to the appellants during the exempt-clearance period.

Issue (ii): Whether the extended period of limitation was invocable and penalty sustainable.

Analysis: The classification declaration and monthly returns disclosed the intended availment of credit on fuel and the clearances without payment of duty. There was no suppression of material facts or deliberate withholding with intent to evade duty. In the absence of suppression, the extended limitation period could not be invoked. Since the dispute turned on interpretation and the credit position had been declared, penalty was also not warranted.

Conclusion: The extended period of limitation was not invocable and the penalty was unsustainable.

Final Conclusion: The demand was required to be recomputed after excluding the time-barred portion, and the penalty was set aside, while the appellants were held not entitled to the disputed fuel credit during the exempted-clearance period.

Ratio Decidendi: Credit under Rule 57AD was unavailable where, during the exemption period, the manufacturer did not produce any dutiable final products alongside exempted goods, and absence of suppression of facts barred invocation of the extended limitation period and penalty.

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