Exemption option under Notification No. 9/2003-CE cannot be withdrawn mid-year; penalty barred in bona fide interpretational dispute.

An exemption option under Notification No. 9/2003-CE, once exercised in writing before the first clearances, could not be withdrawn during the same financial year because the notification barred mid-year cancellation; the exemption therefore continued for that year. In an interpretational dispute over the notification's effect, penalty was not justified because the controversy was bona fide and turned on construction of the exemption regime. The assessee succeeded on withdrawal of the exemption option and on penalty, while the CENVAT credit recovery issue was remanded to the adjudicating authority for fresh decision.

---

---

Issues: (i) Whether a manufacturer who had exercised the option to avail exemption under Notification No. 9/2003-CE could withdraw that option during the same financial year; (ii) Whether penalty was imposable in the circumstances of the dispute.

Issue (i): Whether a manufacturer who had exercised the option to avail exemption under Notification No. 9/2003-CE could withdraw that option during the same financial year.

Analysis: Clause 2(i) of Notification No. 9/2003-CE required the option to be exercised before the first clearances and made it effective from the date of exercise, with a clear bar against withdrawal for the remaining part of the financial year. The option having been exercised in writing, it could not be changed mid-year by subsequently opting to pay duty at the full rate. The exemption therefore continued for the whole financial year.

Conclusion: The option once exercised could not be withdrawn during the same financial year, and the assessee was entitled to the benefit of the notification for that year.

Issue (ii): Whether penalty was imposable in the circumstances of the dispute.

Analysis: The dispute turned on interpretation of the exemption notification and the effect of the option exercised under it. In such an interpretational controversy, penalty was not warranted.

Conclusion: No penalty was imposable.

Final Conclusion: The assessee succeeded on the question of withdrawal of the exemption option and on penalty, while the matter relating to recovery of the CENVAT credit amount was sent back for fresh decision by the adjudicating authority.

Ratio Decidendi: Where an exemption notification expressly prohibits withdrawal of an option during the remaining part of the financial year, the option once exercised remains binding for that year, and penalty is not justified in a bona fide interpretational dispute.

---