Transfer of unutilized Cenvat credit on EOU debonding upheld; penalty fell once the credit transfer was treated as permissible.

In the absence of an express prohibition in the Cenvat Credit Rules, 2004, unutilized Cenvat credit lying with an Export Oriented Unit on debonding was treated as transferable to the successor Domestic Tariff Area unit. The analysis applied the principle that conversion from one scheme to another does not by itself extinguish accumulated credit where the same entity continues operations in a different status. On that basis, denial of the transferred credit was not justified, and the related penalty could not survive once the credit transfer was considered permissible.

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Issues: Whether unutilized Cenvat credit lying in the account of an Export Oriented Unit on debonding could be transferred to the successor Domestic Tariff Area unit, and whether penalty survived once such credit transfer was held permissible.

Analysis: The dispute turned on whether any provision of the Cenvat Credit Rules, 2004 prohibited transfer of the accumulated credit when the same entity, operating both DTA and EOU units, exited the EOU scheme and became entitled to function as a DTA unit. The reasoning followed the earlier view that Rule 10 of the Cenvat Credit Rules, 2004 does not bar transfer of credit upon conversion of a unit from one regime to another, and the same logic was applied in reverse to hold that an EOU on debonding could pass on its unutilized credit to the successor DTA unit. In the absence of a statutory bar, the credit could not be denied merely because the unit changed its scheme status. Since the demand itself failed, the proposed penalty under Rule 15(1) also could not stand.

Conclusion: The transfer of unutilized Cenvat credit was held permissible and the demand was set aside; the penalty was also held unsustainable.

Final Conclusion: The appeal succeeded in full, with the assessee retaining the transferred credit and obtaining relief from the confirmed demand and penalty.

Ratio Decidendi: In the absence of an express prohibition in the Cenvat Credit Rules, 2004, unutilized credit of a debonded EOU may be transferred to the successor DTA unit, and a penalty based solely on denial of such transfer cannot survive.

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