Cenvat credit reversal and interest: liability applies to utilised credit, while penalty fails where dutiability was genuinely disputed.

Interest attaches to Cenvat credit that was actually utilised before later reversal, because the temporary use of the credit creates a compensable period of benefit; the interest liability is therefore confined to the utilised portion for that period. Penalty is not sustainable where the dutiability of the goods remained genuinely disputed and the assessee availed credit only as a precautionary measure, especially when the dispute continued for a long time. The stated legal effect is that interest may survive on utilised credit, but penal consequences are unwarranted on these facts.

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Issues: (i) whether interest was payable on the Cenvat credit utilised before its subsequent reversal; (ii) whether penalty could be sustained where the dutiability of the goods remained under dispute and the credit was availed as a precautionary measure.

Issue (i): Whether interest was payable on the Cenvat credit utilised before its subsequent reversal.

Analysis: The dispute over dutiability remained pending for a long period, and the credit taken by the assessee was ultimately reversed. The credit, however, had been utilised before reversal. In such circumstances, the liability to interest attaches to the amount of credit actually utilised during the intervening period.

Conclusion: Interest is payable only to the extent of Cenvat credit utilised before reversal.

Issue (ii): Whether penalty could be sustained where the dutiability of the goods remained under dispute and the credit was availed as a precautionary measure.

Analysis: Since the dutiability of the goods itself was under dispute and the assessee had availed credit as a precautionary measure, the taking of credit could not be treated as warranting penal consequences. The long pendency of the dispute also weighed against imposition of penalty.

Conclusion: Penalty is not sustainable and stands set aside.

Final Conclusion: The assessee succeeds on the penalty issue, while the Revenue's claim to interest on utilised credit is sustained, resulting in partial relief.

Ratio Decidendi: Where credit is ultimately reversed after utilisation, interest is payable on the utilised portion for the period of utilisation, but penalty is unwarranted when the underlying duty liability was genuinely disputed and the credit was taken only as a precautionary measure.

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