Penalty for common input use in exempted goods was inapplicable after pre-notice payment and absence of recovery mechanism.

Penalty for non-maintenance of separate accounts for common inputs used in dutiable and exempted goods was held not leviable where the amount equivalent to 8% of the exempted goods' value had been paid before the show cause notice. The amount was treated as payable for use of common inputs in exempted goods, not as duty short-levied or short-paid. For the relevant period, there was no proper recovery mechanism under Section 11A of the Central Excise Act, 1944 for such an amount, and the penalty provisions under Rule 12 of the Cenvat Credit Rules, 2002 read with Section 11AC were inapplicable.

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Issues: Whether penalty was leviable for non-maintenance of separate accounts in respect of common inputs used for dutiable and exempted goods, where the amount equivalent to 8% of the value of exempted goods had been paid before the show cause notice.

Analysis: The amount demanded was not treated as duty short-levied or short-paid, but as an amount payable for utilisation of common inputs in exempted goods. The respondent had discharged the amount after the omission was pointed out and before issuance of the show cause notice. In the relevant period, there was no proper recovery mechanism under Section 11A of the Central Excise Act, 1944 for such an amount, and the penalty provisions invoked under Rule 12 of the Cenvat Credit Rules, 2002 read with Section 11AC of the Central Excise Act, 1944 were held inapplicable.

Conclusion: Penalty was not leviable, and the order setting aside the penalty was upheld.

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