CENVAT credit reversal fails where exemption denial is unproved and capital goods credit remains available in the first year.

Revenue's demand for reversal of CENVAT credit on capital goods failed because it did not prove the factual for denying exemption under Notification No. 8/2003-CE. The alleged use of the brand name "Shukla" was unsupported by evidence and was denied by the assessee, while the record showed clearance of waste and scrap within the exemption limit. On those facts, the assessee remained within the exemption scheme and was entitled to take 100% CENVAT credit on capital goods in the first year of receipt. As the foundation for interest and penalty also collapsed, the demand was held unsustainable.

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Issues: Whether the demand for reversal of CENVAT credit on capital goods, along with interest and penalty, was sustainable on the ground that the assessee was not entitled to the exemption under Notification No. 8/2003-CE because of alleged use of the brand name "Shukla", and whether the credit taken in the first year on capital goods was impermissible.

Analysis: The allegation of use of the brand name was not supported by evidence and the assessee had denied such use. The record also showed that waste and scrap were being cleared in the domestic market within the exemption limit prescribed under Notification No. 8/2003-CE. On that basis, the Revenue failed to establish that the assessee was outside the exemption scheme or that it was disentitled to avail the benefit of taking 100% CENVAT credit on capital goods in the first year of receipt. As the foundational premise for reversal, interest, and penalty was not made out, the demand could not survive.

Conclusion: The demand for reversal of credit, interest, and penalty was not sustainable and was set aside in favour of the assessee.

Ratio Decidendi: Where the Revenue fails to prove the factual basis for denial of exemption and the assessee remains within the exemption threshold, reversal of CENVAT credit on capital goods and consequential penalty cannot be sustained.

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