Cenvat credit on final products not used in manufacture was disallowed, while penalty was reduced for absence of fraud allegations.

Cenvat credit was held inadmissible on knitted fabrics, garments and blankets because they were themselves final products and were not used as inputs or in relation to manufacture of the assessee's final product; recovery of the wrongly availed credit was therefore sustained. On penalty, the absence of any allegation of fraud, wilful misstatement, collusion or suppression of facts meant the stricter penalty provision did not apply. The penalty was accordingly confined to the minimum prescribed for wrong availment and reduced to Rs. 10,000, with relief granted only on that issue.

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Issues: (i) Whether Cenvat credit was admissible on goods which were themselves final products and were not used in or in relation to manufacture of the assessee's final product; (ii) Whether the penalty could be sustained at Rs. 35,000 or was liable to be reduced in the absence of any allegation of fraud, wilful misstatement, collusion or suppression of facts.

Issue (i): Whether Cenvat credit was admissible on goods which were themselves final products and were not used in or in relation to manufacture of the assessee's final product.

Analysis: The assessee had taken credit on knitted fabrics, knitted garments and blankets. The record showed that these goods were not used by the assessee in or in relation to manufacture of the final product and that no manufacturing activity was carried out on them. Rule 3 contemplated credit in relation to inputs used for manufacture, and Rule 3(4) dealt with removal of inputs as such. Goods which were themselves final products and did not answer the description of inputs could not attract Cenvat credit merely because they were dealt with in the course of the assessee's business. The plea based on the textile-sector notification did not assist the assessee in the present factual setting.

Conclusion: Cenvat credit was not admissible and the recovery of the disallowed credit was upheld against the assessee.

Issue (ii): Whether the penalty could be sustained at Rs. 35,000 or was liable to be reduced in the absence of any allegation of fraud, wilful misstatement, collusion or suppression of facts.

Analysis: The show cause notice did not allege any guilty mind. On that basis, penalty could be imposed only under Rule 13(1) and not under the stricter provision requiring fraudulent intent. Rule 13(1) prescribed a minimum penalty of Rs. 10,000. Since the wrong credit had also been reversed, the circumstances justified confining the penalty to the statutory minimum.

Conclusion: The penalty was reduced to Rs. 10,000 and the assessee succeeded to that extent.

Final Conclusion: The disallowance and recovery of Cenvat credit were affirmed, but the penalty was substantially reduced to the statutory minimum, so the appeal succeeded only on the penalty issue.

Ratio Decidendi: Cenvat credit is not admissible on goods that are themselves final products and are not used as inputs in or in relation to manufacture, and in the absence of allegations of fraud or suppression, penalty can be imposed only under the provision applicable to mere wrong availment, not the harsher penalty provision.

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