CENVAT credit on inputs for exempt goods is inadmissible, while penalty may be waived in a bona fide interpretive dispute.

CENVAT credit taken on inputs used in the manufacture of wholly exempt goods was held inadmissible and recoverable, because the credit scheme allows input credit only where the final product is dutiable. The Tribunal followed the binding apex court view that credit cannot be retained for exempted clearances and rejected the assessee's contrary reliance. Penalty was, however, deleted because the dispute arose from interpretation of the MODVAT/CENVAT scheme and the facts did not justify punitive action. The demand therefore survived, but the penal component was set aside.

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Issues: (i) Whether CENVAT credit taken on inputs used in the manufacture of wholly exempted goods was recoverable. (ii) Whether penalty was imposable in the facts of the case.

Issue (i): Whether CENVAT credit taken on inputs used in the manufacture of wholly exempted goods was recoverable.

Analysis: The credit scheme permits input credit only where the final product suffers excise duty. Where inputs are used in the manufacture of exempted goods, the credit attributable to such inputs is not admissible and can be recovered. The Tribunal followed the binding apex court view that credit cannot be retained on inputs used for exempted clearances, and preferred that authority over the contrary line relied on by the assessee.

Conclusion: The credit demand was sustainable and the assessee was not entitled to retain CENVAT credit on inputs used in the exempt goods.

Issue (ii): Whether penalty was imposable in the facts of the case.

Analysis: The dispute turned on interpretation of the MODVAT/CENVAT scheme, and the Tribunal found that the surrounding facts did not justify punitive action. Even though the demand survived, the nature of the controversy did not warrant penalty.

Conclusion: Penalty was not imposable.

Final Conclusion: The duty demand was restored, but the penal component was deleted, resulting in a partial success for the Revenue.

Ratio Decidendi: CENVAT credit is not allowable on inputs used in the manufacture of wholly exempted goods, though penalty may be refused where the controversy is one of interpretation.

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