Rule 6(3) Cenvat credit demand needs factual verification; penalty fails without mala fide in exempted goods dispute

Rule 6(3) Cenvat credit demand could not be finally sustained where the factual basis was unclear on whether proportionate reversal had already been made or the goods had been exported, and the credit was originally availed when the final products were dutiable; the matter was therefore remanded for fresh verification. Penalty was not justified in the absence of mala fide, particularly as the dispute arose only after the products became exempt, and the penal finding against the assessee was set aside.

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Issues: (i) Whether the demand of Cenvat credit under Rule 6(3) of the Cenvat Credit Rules, 2004 was sustainable in view of the assessee's plea of proportionate reversal and export of goods. (ii) Whether penalty on the assessee was justified in the absence of mala fide, and whether the penalty set aside in respect of the other respondents required interference.

Issue (i): Whether the demand of Cenvat credit under Rule 6(3) of the Cenvat Credit Rules, 2004 was sustainable in view of the assessee's plea of proportionate reversal and export of goods.

Analysis: The goods in question became exempt only from 01.03.2008, while the assessee had originally taken credit when the final products were dutiable. The record did not clearly establish whether proportionate credit had already been reversed or whether the goods were exported, and the relevant factual position was not ascertainable from the orders below. In such circumstances, the applicability of Rule 6(3) could not be finally decided without verification of the records and the assessee's submissions.

Conclusion: The demand issue was set aside and remanded to the original adjudicating authority for fresh examination.

Issue (ii): Whether penalty on the assessee was justified in the absence of mala fide, and whether the penalty set aside in respect of the other respondents required interference.

Analysis: The assessee had taken credit at a time when all the final products were dutiable, and the dispute arose only after menthol and menthol crystals became exempt. On those facts, no mala fide could be attributed for invoking penal provisions. The penalty on the other respondents had already been set aside and the Revenue's challenge to that part was dismissed under the litigation policy. The absence of culpable intent and the incomplete factual foundation negated the basis for sustaining the penalty.

Conclusion: The penalty imposed on the assessee was set aside, and the challenge relating to the other respondents did not survive on merits.

Final Conclusion: The matter was sent back for reconsideration on the credit demand, while the penalty against the assessee was annulled, leaving the Revenue without relief on the penal issue.

Ratio Decidendi: Where the factual foundation for the applicability of Rule 6(3) is unclear, and credit was originally availed when the final products were dutiable, the demand cannot be sustained without verification; penalty cannot be imposed in the absence of mala fide.

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