Penalty for wrongful Cenvat credit availment fails when the substantive demand is dropped and no separate allegation survives.

Penalty under Rule 13 of the Cenvat Credit Rules, 2002 cannot stand where the show cause notice was confined to alleged wrongful availment of Cenvat credit and the principal demand on that allegation was dropped. The notice did not separately propose penalty on the distinct issue of delayed receipt of goods from job workers, so the penal foundation disappeared once the substantive credit demand failed. The assessee's reversal of credit and prior payment of interest supported its case, but the decisive reason was the absence of any surviving basis for penalty. The penalties were therefore set aside.

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Issues: Whether penalties imposed under Rule 13 of the Cenvat Credit Rules, 2002 could survive when the show cause notice was founded only on alleged wrongful availment of Cenvat credit and the principal demand on that count had already been dropped.

Analysis: The proceedings originated from the allegation that Cenvat credit of Rs. 38,23,069/- had been wrongly availed on the footing that the process did not amount to manufacture. The show cause notice, including the allegations of suppression and the justification for penalty, was confined to that alleged wrongful availment. It did not propose penalty on the separate issue of non-receipt of goods from job workers within 180 days. The principal demand on which the penal proposal rested had been dropped by the adjudicating authority and was not revived. In these circumstances, the penal action under Rule 13, which applied to wrongful availment of credit, had no independent foundation. The reversal of credit on the spot and prior payment of interest further supported the assessee's case, but the decisive factor remained the absence of any penal foundation after the main credit demand was dropped.

Conclusion: The penalties under Rule 13 of the Cenvat Credit Rules, 2002 were unsustainable and were set aside.

Ratio Decidendi: A penalty proposed solely on the basis of alleged wrongful availment of Cenvat credit cannot survive once the substantive demand on that very allegation is dropped and the show cause notice does not separately and specifically allege the conduct said to justify the penalty.

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