Cenvat credit on inputs for exempt goods is inadmissible, and wrongful availment can attract penalty

Cenvat credit is not admissible on inputs used for exempt final products once exemption operates, including inputs in stock, inputs consumed in work-in-process, and inputs contained in finished goods awaiting clearance. The Tribunal applied the settled position that credit cannot be retained on such inputs after the final product becomes exempt, and sustained denial of credit in favour of the Revenue. It also recognised that deliberate wrongful availment of ineligible credit attracts penalty; prior payment before the show cause notice may affect only the quantum, not the existence of penal liability. A reduced penalty was therefore sustained against the assessee.

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Issues: (i) Whether Modvat/Cenvat credit was admissible on inputs used in the manufacture of final products which had become exempt from duty, including inputs lying in stock, in process, or contained in finished goods in stock. (ii) Whether penalty was warranted for wrongful availment of ineligible credit.

Issue (i): Whether Modvat/Cenvat credit was admissible on inputs used in the manufacture of final products which had become exempt from duty, including inputs lying in stock, in process, or contained in finished goods in stock.

Analysis: The exclusion of credit under the Cenvat scheme applies to inputs used in the manufacture of exempted goods. Once the final product stood exempt from duty, credit could not be retained on inputs lying in stock, inputs already consumed in the manufacture of goods in process, or inputs contained in finished goods awaiting clearance. The Tribunal followed the settled view that no credit is admissible on such inputs after exemption operates.

Conclusion: Credit was held inadmissible on the relevant inputs, against the assessee and in favour of the Revenue.

Issue (ii): Whether penalty was warranted for wrongful availment of ineligible credit.

Analysis: Wrongful and deliberate availment of credit not permissible in law justified penal consequences. Partial payment of duty before the show cause notice could be taken only as a factor for leniency in determining the quantum, not as a basis for complete waiver of penalty.

Conclusion: Penalty was held payable, though reduced in amount, against the assessee and in favour of the Revenue.

Final Conclusion: The Revenue succeeded on the merits, the assessee was denied credit on inputs linked to exempt goods, and a reduced penalty was sustained.

Ratio Decidendi: Cenvat credit is not admissible on inputs used in the manufacture of exempted final products, and deliberate wrongful availment may attract penalty, with prior payment relevant only to quantum.

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