CENVAT credit on supplementary invoices requires culpable conduct tied to the inputs themselves; penalty cannot stand otherwise.

CENVAT credit under Rule 7(1)(b) of the Cenvat Credit Rules, 2002 can be denied on supplementary invoices only where the additional duty on the very inputs claimed as credit became payable because of fraud, collusion, wilful misstatement, suppression of facts or similar culpable conduct with intent to evade duty. Where the Settlement Commission recorded suppression only for imported finished goods and made no such finding in relation to the imported inputs, the statutory bar to credit was not attracted. On that basis, denial of CENVAT credit and the connected penalty were unjustified and were set aside.

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Issues: Whether CENVAT credit could be denied under Rule 7(1)(b) of the Cenvat Credit Rules, 2002 on the basis that differential duty on imported inputs became payable due to suppression of facts, fraud or similar grounds, and whether penalty could consequently be sustained.

Analysis: Rule 7(1)(b) permits credit on supplementary invoices unless the additional duty became recoverable from the manufacturer or importer on account of non-levy or short levy by reason of fraud, collusion, wilful misstatement, suppression of facts or contravention of the Act or the Customs Act, 1962 with intent to evade duty. The dispute in relation to the imported goods was settled before the Settlement Commission. The Commission's findings showed suppression only in relation to the imported finished products, while no such finding was recorded in respect of the imported inputs from which the CENVAT credit was claimed. As the credit-related duty did not become recoverable on account of the disqualifying grounds specified in the rule, the statutory condition for denial of credit was not met.

Conclusion: Denial of CENVAT credit and the consequential penalty were not justified and were set aside in favour of the assessee.

Final Conclusion: The appeal succeeded and the appellants were entitled to consequential relief.

Ratio Decidendi: CENVAT credit under Rule 7(1)(b) cannot be denied unless the short levy relating to the very inputs in question is found to have arisen from fraud, suppression of facts or other specified culpable conduct with intent to evade duty.

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