CENVAT credit on returned goods turns on proof of duty refund; demand sustained, penalty set aside.

CENVAT credit on returned goods under Rule 16(1) of the Central Excise (No.2) Rules, 2001 was denied where verification showed credit notes covered only part of the claim and no documentary evidence established refund of the duty component to buyers for the balance. The material on record supported confirmation of the demand because the adverse verification report was not satisfactorily answered by the correlation of goods and documents. The penalty was found excessive on the facts and was set aside.

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Issues: Whether CENVAT credit on returned goods was correctly denied to the extent of Rs.85,027 and whether the penalty of Rs.15,000 was sustainable.

Analysis: The credit claim was examined under Rule 16(1) of the Central Excise (No.2) Rules, 2001. The adjudicating authority had relied on the Range Officer's verification report, which showed that credit notes had been issued only for part of the amount and that there was no documentary evidence for the remaining amount to establish that the duty component had been refunded to the buyers for the returned goods. The appellate finding that identity of the goods and related documents had been correlated did not address the adverse verification report. On the material available, the demand was properly confirmed. However, the penalty was considered excessive in the facts of the case.

Conclusion: The demand of Rs.85,027 was upheld and the penalty of Rs.15,000 was set aside.

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