Cenvat credit penalty reduced where common-input use was disclosed in returns despite liability under Rule 6

Where Cenvat credit was taken on common inputs used for both dutiable and exempted products, the liability under Rule 6 was accepted, but the equivalent penalty was held excessive in view of the disclosure of relevant particulars in statutory returns. The text notes that recovery machinery under Rule 12 of the Cenvat Credit Rules, 2002 remained available, that the credit period fell within the 2002 and 2004 Rules, and that the assessee knew the requirement to pay 8% when separate accounts were not maintained. Even so, because the material facts were reflected in periodical returns, the penalty was reduced to Rs. 20,000 under Rule 13(1), while the duty-related findings were left undisturbed.

---

---

Issues: Whether the penalty imposed for availment of Cenvat credit in respect of common inputs used for dutiable and exempted products was sustainable and, if not, what quantum of penalty was .

Analysis: The dispute related to demand under Rule 6 of the Cenvat Credit Rules in respect of liquid nitrogen used for manufacture of both dutiable and exempted final products. The Appellant did not contest the duty liability, but disputed the imposition of equivalent penalty. The reasoning accepted that recovery machinery existed under Rule 12 of the Cenvat Credit Rules, 2002 and that the plea based on absence of such machinery after amendment by Section 82 of the Finance Act, 2005 was not applicable. It was also noted that the period of availment fell within the operation of the Cenvat Credit Rules, 2002 and 2004, and that the Appellant was aware of the requirement to pay 8% where common inputs were used without maintaining separate accounts. At the same time, the records showed that relevant details regarding dutiable and exempted goods had been reflected in the periodical returns, which weighed against sustaining the full penalty.

Conclusion: The equivalent penalty was not sustained in full and was reduced to Rs. 20,000/- under Rule 13(1) of the Cenvat Credit Rules, 2002.

Final Conclusion: The appeal succeeded only to the limited extent of reduction of penalty, while the duty-related findings were not disturbed.

Ratio Decidendi: Where credit-related irregularity is otherwise established but the assessee has disclosed material particulars in statutory returns, the penalty may be restricted to a reduced amount in the interest of justice rather than sustained at the equivalent statutory level.

---