Interpretational dispute under Cenvat rules: penalty was unsustainable, and no further differential demand could be fastened after reversal by the job worker.

Penalty under Section 11AC of the Central Excise Act was held unsustainable where the dispute concerned only interpretation of valuation for payment under Rule 6(3)(b) of the Cenvat Credit Rules in a works contract situation and no mala fide or suppression was shown. The demand was therefore not supported by the penal provision. Separately, a further differential demand of 8% was set aside because the goods were manufactured by the job worker, who had already reversed the amount under Rule 6(3)(b); on those facts, no additional recovery could be fastened on the appellant on the same basis. The corresponding penalty also failed.

---

---

Issues: (i) Whether penalty under Section 11AC of the Central Excise Act, 1944 was sustainable in respect of the demand of about Rs. 4,985 arising from interpretation of valuation for the purpose of Rule 6(3)(b) of the Cenvat Credit Rules, 2004. (ii) Whether a differential amount of 8% could be demanded from the appellant where the goods were manufactured by job workers who had already reversed the amount under Rule 6(3)(b) of the Cenvat Credit Rules, 2004.

Issue (i): Whether penalty under Section 11AC of the Central Excise Act, 1944 was sustainable in respect of the demand of about Rs. 4,985 arising from interpretation of valuation for the purpose of Rule 6(3)(b) of the Cenvat Credit Rules, 2004.

Analysis: The dispute on this component turned on the method of valuation for determining the amount payable under Rule 6(3)(b) in a works contract situation. The amount involved was small and the controversy was one of interpretation rather than suppression or deliberate evasion. In such circumstances, no mala fide could be attributed to the appellant.

Conclusion: Penalty under Section 11AC was not imposable and was set aside for this amount.

Issue (ii): Whether a differential amount of 8% could be demanded from the appellant where the goods were manufactured by job workers who had already reversed the amount under Rule 6(3)(b) of the Cenvat Credit Rules, 2004.

Analysis: The goods in question were manufactured by the job worker, who had already reversed 8% under Rule 6(3)(b). Since the manufacturing activity was undertaken by the job worker, any short payment, if at all, could not be fastened on the appellant by demanding a further differential amount on the same basis. The corresponding penalty also could not survive.

Conclusion: The differential demand and the corresponding penalty were unsustainable and were set aside.

Final Conclusion: The impugned order was modified and the appeal was allowed in part by deleting the penalty on the first demand and setting aside the second demand with its consequential penalty.

Ratio Decidendi: Penalty under Section 11AC cannot be imposed where the dispute is purely interpretational and devoid of mala fide, and no further differential demand can be sustained against a recipient when the relevant reversal under Rule 6(3)(b) has already been made by the actual manufacturer.

---