Pre-notice reversal of CENVAT credit defeats demand and penalty for exempted clearances; separate interest demand was also absent.

Credit reversed before the show cause notice for inputs used in exempted goods; on that factual basis, the demand raised by applying 8% of the value of exempted clearances could not be sustained, and the penalty also failed. The challenge was further weakened because the grounds of appeal did not dispute the reversal amount already recorded. The interest contention was rejected as no separate interest demand had been made in the adjudication order.

---

---

Issues: Whether the Revenue could sustain the demand and penalty when the assessee had reversed the credit relatable to inputs used in exempted goods before issuance of the show cause notice.

Analysis: The dispute concerned manufacture of both dutiable and exempted goods, and the demand had been quantified on the basis of 8% of the value of exempted clearances on the footing that proper reversal had not been made. The records showed that the credit of the amount relatable to the exempted goods had already been reversed prior to the show cause notice. Following the principle that once credit is reversed before notice the demand cannot survive, and noticing that the grounds of appeal did not dispute the reversal amount, the challenge to the order of the Commissioner (Appeals) was held to be untenable. The contention regarding interest also failed because no separate demand of interest had been made in the adjudication order.

Conclusion: The demand and penalty were not sustainable, and the Revenue's appeal was rejected.

---