Cenvat credit on capital goods used for exempted production was denied, with statutory interest upheld on wrongly taken credit.

Cenvat/Modvat credit on capital goods was inadmissible where the goods, when received and put to use, were used exclusively to manufacture exempted final products; later dutiable clearances or future manufacturing plans did not alter that eligibility test. The recovery of wrongly taken credit was therefore upheld, with only the quantum remitted for fresh determination. On penalty, Section 11AC was not sustainable because the assessee had disclosed the manufacturing arrangement and acted under a bona fide belief, though liability under the rule-based penal provisions was left open for reconsideration in remand. Interest was recoverable on wrongly taken credit even if the credit remained unutilized, as the excise provisions mandated such recovery.

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Issues: (i) whether Cenvat/Modvat credit on capital goods was admissible when those goods were used exclusively, during the relevant period, in the manufacture of exempted final products; (ii) whether the assessee was liable to penalty under the excise rules and the Act; and (iii) whether interest was recoverable on wrongly taken credit even though it remained unutilized.

Issue (i): whether Cenvat/Modvat credit on capital goods was admissible when those goods were used exclusively, during the relevant period, in the manufacture of exempted final products.

Analysis: The applicable rule barred credit on capital goods used exclusively in the manufacture of final products on which no duty was payable. The machinery covered by the dispute was found to have been used only for manufacturing grey woven cotton fabrics during the relevant period, and not for any dutiable production in that period. The later commencement of dutiable clearances and the assessee's broader manufacturing plans did not alter the position that credit eligibility had to be determined when the capital goods were received and put to use.

Conclusion: The credit was not admissible and the recovery of the credit was upheld, subject to the limited remand on quantum.

Issue (ii): whether the assessee was liable to penalty under the excise rules and the Act.

Analysis: A composite penalty was imposed under multiple provisions. The finding distinguished between penalty under the Act and penalty under the rules. The assessee was held not to deserve penalty under Section 11AC because the department had been informed of the manufacturing arrangement and the assessee had a bona fide belief regarding eligibility. At the same time, the notice was held sufficient to sustain liability under the rule-based penal provisions. The composite penalty, however, could not stand in the form imposed and the matter required fresh consideration in remand.

Conclusion: Penalty under Section 11AC was not sustainable, while liability under Rule 173Q and Rule 13(2) remained open for fresh determination in remand.

Issue (iii): whether interest was recoverable on wrongly taken credit even though it remained unutilized.

Analysis: The relevant excise provisions mandated recovery of wrongly taken credit along with interest. The comparison drawn from income-tax provisions was rejected because those provisions conferred discretion not found in the excise rules. The fact that the credit had not been utilized did not defeat the statutory mandate to recover interest on wrongly taken credit.

Conclusion: Interest was recoverable and the departmental appeal succeeded on this point.

Final Conclusion: The order sustained denial of credit on the capital goods, sent the quantum aspect back for fresh decision, and directed recovery of interest in de novo proceedings, while the penalty issue was left for reconsideration in remand.

Ratio Decidendi: Eligibility for capital goods credit is determined by the use of the goods when received and put to use, and credit is not available where the goods are used exclusively for exempted production; wrongly taken credit attracts statutory interest irrespective of utilization.

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