Retrospective credit reversal on exempted inputs attracts interest, but no penalty follows where the dispute is one of interpretation.

Retrospective amendments to Rule 57CC of the Central Excise Rules and Rule 6 of the Cenvat Credit Rules required reversal of credit attributable to common inputs used in exempted clearances. The assessee was therefore bound to reverse the credit taken on inputs used in exempted products, and the reversal already made attracted interest because the liability operated from the relevant date under the Finance Act, 2005 amendments. Penalty was not warranted, as the dispute arose from statutory interpretation rather than contumacious conduct. The credit reversal and interest liability were sustained, while penalty was set aside.

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Issues: (i) Whether credit taken on common inputs used in the manufacture of exempted goods was required to be reversed in view of the retrospective amendment. (ii) Whether interest was payable on the reversed amount and whether penalty was warranted.

Issue (i): Whether credit taken on common inputs used in the manufacture of exempted goods was required to be reversed in view of the retrospective amendment.

Analysis: The dispute related to common inputs used for both dutiable and exempted products. The retrospective amendment to Rule 57CC of the Central Excise Rules and Rule 6 of the Cenvat Credit Rules applied to the relevant period and required reversal of the credit attributable to exempted goods. The record also showed that the assessee had already reversed the demands raised, and a balance amount was undertaken to be reversed shortly.

Conclusion: The assessee was required to reverse the credit taken on inputs used in exempted products.

Issue (ii): Whether interest was payable on the reversed amount and whether penalty was warranted.

Analysis: The retrospective amendment under Sections 82 and 83 of the Finance Act, 2005 made the interest liability operative from the relevant date. The amount already reversed therefore carried interest liability. Since the dispute turned on interpretation of law, penal consequences were not justified.

Conclusion: Interest was payable on the reversed amount, but no penalty was imposable.

Final Conclusion: The credit reversal and interest liability were sustained, while penalty was set aside, and the appeals were disposed of accordingly.

Ratio Decidendi: Where retrospective amendment applies to exempted clearances, credit attributable to common inputs must be reversed and interest follows on the reversed amount, but penalty is unwarranted when the dispute is one of statutory interpretation.

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