CENVAT credit under compounded levy scheme cannot offset duty, while mandatory interest survives and penalty may be reduced.

CENVAT credit on inputs could not be used to discharge duty on non-alloy steel ingots and billets cleared under the compounded levy scheme, because goods covered by Section 3A were excluded from the relevant input-credit regime. Rule 96ZO(3) was treated as permitting a maximum penalty equal to duty, not mandating that ceiling in every case, so a lesser penalty was justified on the facts. Interest on the duty demand remained payable because the rule imposed mandatory liability to interest on the duty amount demanded. Duty and interest were sustained, while the penalty was reduced.

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Issues: (i) Whether CENVAT credit taken on inputs could be utilised for payment of duty on non-alloy steel ingots and billets cleared under the compounded levy scheme; (ii) Whether the penalty imposed equal to duty under Rule 96ZO(3) required reduction; (iii) Whether interest on the duty demand was payable.

Issue (i): Whether CENVAT credit taken on inputs could be utilised for payment of duty on non-alloy steel ingots and billets cleared under the compounded levy scheme.

Analysis: Goods liable to duty under Section 3A of the Central Excise Act were specifically excluded from the input-credit regime under Rule 57A of the Central Excise Rules, 1944, and the relevant notifications. The goods manufactured by the assessee were neither eligible inputs for credit nor final products for utilisation of such credit under that scheme. Credit accrued on inputs could therefore not be used for payment of duty on clearances made under the compounded levy arrangement.

Conclusion: The assessee was not entitled to utilise CENVAT credit for payment of duty under the compounded levy scheme, and the duty demand was upheld.

Issue (ii): Whether the penalty imposed equal to duty under Rule 96ZO(3) required reduction.

Analysis: Rule 96ZO(3) prescribed only a maximum penalty equal to duty. The existence of a ceiling did not make the maximum mandatory in every case. Considering the facts and circumstances, a lesser penalty was warranted.

Conclusion: The penalty was reduced to Rs. 2,00,000/- and the assessee obtained partial relief on this issue.

Issue (iii): Whether interest on the duty demand was payable.

Analysis: The language of Rule 96ZO(3) made the liability to interest mandatory on the amount of duty demanded, leaving no room for exemption.

Conclusion: Interest on the duty demand was payable by the assessee.

Final Conclusion: The demand of duty and interest was sustained, while the penalty was substantially reduced, resulting in a partial allowance of the appeal against the penalty order.

Ratio Decidendi: Where a penal provision prescribes only a maximum penalty, the adjudicating authority may impose a lesser penalty based on the facts, but statutory interest couched in mandatory terms remains payable, and credit not available under the applicable levy scheme cannot be used to discharge duty under that scheme.

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