CENVAT credit reversal for sub-standard goods in factory fails absent a statutory basis for demand, penalty, or interest.

Imported goods tested sub-standard but remained in the factory, and no statutory provision was identified requiring reversal of credit on that basis. Credit had been reversed after the departmental visit, but the absence of removal from the factory and the lack of a legal basis for reversal meant the demand for recovery could not be sustained. Penalty and interest were likewise not maintainable on these facts, and the assessee succeeded.

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Issues: Whether reversal of credit, penalty, and interest were sustainable where the imported goods were found sub-standard but remained in the factory and no provision was shown requiring reversal on those facts.

Analysis: The goods were received in the factory, tested, found sub-standard, and were not shown to have been removed from the factory. The Court noted that the credit had been reversed after the departmental visit and that no legal provision was pointed out to require reversal merely because the goods were rejected while still lying in the factory. In the absence of a supporting statutory basis, the demand for recovery, penalty, and interest could not be sustained.

Conclusion: The demand, penalty, and interest were set aside, and the assessee succeeded.

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