Cenvat credit on inputs remains available for dutiable goods, and Section 11AC penalty needs evasion intent.

Cenvat credit is admissible on inputs used to manufacture dutiable goods, and the fact that duty was later paid with interest on the final product does not by itself justify denial of credit. The note states that entitlement to credit follows the duty-paid character of the final product, even if proceedings were initiated earlier. Penalty under Section 11AC requires the statutory ingredients of suppression or mala fide intention to evade duty; in the absence of such an allegation in the show cause notice, the penalty cannot be sustained. The order allowing credit and dropping penalty was upheld.

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Issues: (i) whether Cenvat credit on inputs used in manufacture was admissible when the final product had become dutiable and duty had been paid with interest; (ii) whether penalty under Section 11AC could be sustained in the absence of an allegation of mala fide intention to evade duty.

Issue (i): Whether Cenvat credit on inputs used in manufacture was admissible when the final product had become dutiable and duty had been paid with interest.

Analysis: Credit under the Cenvat scheme is available where inputs are used for manufacture of dutiable goods. Once the final product is liable to duty and duty has in fact been paid, the input credit cannot be denied merely because the proceedings were initiated earlier. The entitlement to credit follows the duty-paid character of the final product.

Conclusion: The respondent was entitled to take Cenvat credit on inputs used in manufacturing the dutiable final product.

Issue (ii): Whether penalty under Section 11AC could be sustained in the absence of an allegation of mala fide intention to evade duty.

Analysis: Penalty under Section 11AC requires the ingredients contemplated by that provision, including suppression or mala fide intention to evade duty. Where the show cause notice does not allege such intention, the statutory basis for penalty is not made out.

Conclusion: Penalty under Section 11AC was not sustainable and was rightly dropped.

Final Conclusion: The order allowing Cenvat credit and setting aside penalty was upheld, and the Revenue's appeal failed.

Ratio Decidendi: Cenvat credit is admissible on inputs used to manufacture dutiable goods, and penalty under Section 11AC cannot be imposed unless the requisite allegation and proof of evasion-oriented mala fide conduct are present.

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