Common Cenvat credit and retrospective recovery: interest upheld, major penalty set aside, admitted duty short-payment penalty sustained

Common Cenvat credit used for both dutiable and exempted final products, without separate accounts or inventory, remained recoverable with interest under the retrospective recovery mechanism introduced by the Finance Act, 2005. However, penalty could not be sustained for the pre-amendment period merely on that basis, because the recovery provision operated retrospectively rather than creating an earlier penal liability. The separate penalty for clearance of dutiable goods without payment of duty, which was admitted, was sustained.

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Issues: Whether penalty could be sustained for non-payment of the amount attributable to common Cenvat credit used in the manufacture of dutiable and exempted final products for the period prior to the retrospective recovery provision, and whether the penalty imposed for clearance of dutiable goods without payment of duty was sustainable.

Analysis: The input molasses was admittedly used commonly for dutiable and exempted final products, and separate accounts and inventory were not maintained as required. The amount payable under Rule 57AD(2) of the Central Excise Rules, 1944 and Rule 6(3) of the Cenvat Credit Rules, 2001/2002 was therefore recoverable along with interest after the retrospective introduction of the recovery provision by Section 82 of the Finance Act, 2005. However, for the earlier period, penalty could not be imposed merely on that basis. The penalty relating to short-payment of duty on Ordinary Denatured Spirit was separately admitted and was not disputed.

Conclusion: The demand under Rule 57AD(2) of the Central Excise Rules, 1944 and Rule 6(3) of the Cenvat Credit Rules, 2001/2002, along with interest, was upheld, but the penalty of Rs. 59,73,020/- was set aside. The penalty of Rs. 1,348/- for clearance of dutiable goods without payment of duty was upheld.

Final Conclusion: The appeal succeeded only to the extent of deletion of the major penalty, while the substantive duty-related liability with interest and the admitted smaller penalty were sustained.

Ratio Decidendi: Penalty cannot be imposed for non-payment of the amount payable on common input credit for the pre-amendment period where the recovery mechanism was introduced only retrospectively, though the amount and interest remain recoverable.

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