Cenvat credit on capital goods for exempted goods is barred, but penalty may fail where credit was unutilised and law was disputed.

Cenvat credit on capital goods used exclusively to manufacture exempted final products is barred under Rule 6(4) of the Cenvat Credit Rules, 2004 unless the exemption falls within the limited exception for exemptions based on value or quantity of clearances in a financial year. Where that exception does not apply, the credit is inadmissible and the demand is sustained. Penalty under Rule 15 is not justified where the credit was not utilised during the relevant period and the dispute turns on interpretation of the credit provisions, so penalty may be deleted.

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Issues: (i) Whether Cenvat credit on capital goods was admissible when the capital goods were used exclusively for the manufacture of exempted final products. (ii) Whether penalty was sustainable when the credit had not been utilised and the eligibility issue involved interpretation of law.

Issue (i): Whether Cenvat credit on capital goods was admissible when the capital goods were used exclusively for the manufacture of exempted final products.

Analysis: Rule 6(4) of the Cenvat Credit Rules, 2004 prohibits credit on capital goods used exclusively in the manufacture of exempted goods, except where the exemption is granted on the basis of value or quantity of clearances in a financial year. The capital goods in question were used exclusively for exempted goods, and the exemption notification relied on did not fall within that exception. The condition in the exemption notification could not override the statutory bar on credit.

Conclusion: The denial of Cenvat credit was upheld and the demand was sustained against the assessee.

Issue (ii): Whether penalty was sustainable when the credit had not been utilised and the eligibility issue involved interpretation of law.

Analysis: The record indicated that the credit taken on capital goods had not been utilised during the material period. The dispute also turned on interpretation of the credit provisions. In these circumstances, imposition of penalty under Rule 15 was not justified.

Conclusion: The penalty was set aside in favour of the assessee.

Final Conclusion: The demand of Cenvat credit was maintained, but the penalty was deleted, resulting in a partial relief to the assessee.

Ratio Decidendi: Cenvat credit is not allowable on capital goods used exclusively for exempted goods where the statutory exception in Rule 6(4) does not apply, but penalty may be waived where the credit was not utilised and the dispute is one of legal interpretation.

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