Ineligible Cenvat credit upheld, but penalty set aside after Settlement Commission settlement protected the co-noticee.

Ineligible Cenvat credit taken on inputs from a 100% EOU was held recoverable because the supplier had wrongly availed Notification No. 23/03-CE and the invoices did not establish valid duty payment, so the demand and appropriation of the reversed amount were upheld. However, penalty under Rule 13(1) was set aside because the appellant had relied on duty-paid documents and could not verify the supplier's duty position at that stage; once the supplier's case had been settled by the Settlement Commission, the majority view treated the matter as concluded in a manner extending protection to the co-noticee from penalty.

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Issues: Whether penalty under Rule 13(1) of the Cenvat Credit Rules, 2002 was sustainable where the appellant had taken ineligible Cenvat credit on inputs from a 100% EOU and the supplier's case had been settled by the Settlement Commission.

Analysis: The credit demand was based on invoices showing duty paid by the supplier under Notification No. 23/03-CE dated 31/03/2003, though the supplier was found to have availed the notification incorrectly. On that basis, the credit taken by the appellant was not available and the demand and appropriation of the reversed amount were upheld. On penalty, the Tribunal noted that the appellant had taken credit on documents showing duty payment by the supplier and could not at that stage verify the correctness of the supplier's duty payment. The Tribunal further accepted that, once the supplier's case had been settled by the Settlement Commission, the matter stood concluded in a manner that also protected the co-noticee from penalty, following the cited majority view.

Conclusion: The penalty on the appellant was not sustainable and was set aside, while the demand of duty remained upheld.

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