Cenvat credit on inputs for later-exempt goods was recoverable, while penalty was deleted for insufficient grounds.

Cenvat credit attributable to inputs used in manufacturing goods that later became wholly exempt from Central Excise duty was held recoverable, because the credit scheme operates only where the final product bears duty and credit is not admissible for exempted goods. The Tribunal accepted that the applicable rules expressly supported reversal of wrongly utilised credit and distinguished earlier decisions based on the absence of a specific reversal provision. On penalty, it found the surrounding circumstances insufficient to justify penal action and set the penalty aside. The credit demand was therefore sustained, while the assessee obtained relief only on penalty.

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Issues: (i) Whether Cenvat credit taken on inputs became recoverable when the finished goods, earlier dutiable, later became exempt from Central Excise duty; (ii) Whether penalty was imposable in the facts of the case.

Issue (i): Whether Cenvat credit taken on inputs became recoverable when the finished goods, earlier dutiable, later became exempt from Central Excise duty.

Analysis: The scheme of Cenvat credit is intended to avoid cascading of duty and operates only where the final product bears excise duty. Once the final product becomes wholly exempt, the credit relatable to inputs used for such exempted goods is not allowable. A harmonious reading of the relevant Cenvat provisions supports reversal and recovery of credit wrongly utilised for manufacture of exempt goods. The earlier decisions relied on by the appellant were distinguished on the ground that they proceeded in the absence of a specific reversal provision, whereas the applicable rules expressly covered the situation.

Conclusion: The demand for reversal and recovery of Cenvat credit was upheld, against the assessee.

Issue (ii): Whether penalty was imposable in the facts of the case.

Analysis: Although the credit demand was sustained, the Tribunal found that the surrounding circumstances did not justify imposition of penalty.

Conclusion: Penalty was set aside, in favour of the assessee.

Final Conclusion: The credit demand was sustained, but the penalty was deleted, resulting in only partial relief to the assessee.

Ratio Decidendi: Cenvat credit attributable to inputs used in manufacturing goods that become wholly exempt is recoverable, since credit is not admissible where the final product does not suffer duty.

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