Cenvat credit formula must follow the prescribed base value; penalty unavailable for bona fide interpretation dispute

For Cenvat credit computation under Rule 3(7), the assessable value factor "X" had to be applied as the formula requires and could not be treated as inclusive of basic customs duty; the credit was therefore to be calculated on the assessable value shown in the invoices, and the excess credit was upheld. Where the dispute involved a bona fide legal interpretation of the credit formula and the credit position was fully disclosed in statutory records, penalty was not warranted; the penal consequence was set aside.

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Issues: (i) Whether, for the purpose of credit under Rule 3(7) of the Cenvat Credit Rules, 2004, the assessable value factor "X" was to be treated as inclusive of basic customs duty. (ii) Whether penalty was imposable when the credit dispute arose from a legal interpretation and the credit was reflected in the statutory records.

Issue (i): Whether, for the purpose of credit under Rule 3(7) of the Cenvat Credit Rules, 2004, the assessable value factor "X" was to be treated as inclusive of basic customs duty.

Analysis: The formula prescribed under Rule 3(7) requires the assessable value to be applied as the base factor, and the computation has to proceed by opening the internal brackets in the manner the formula is structured. On that basis, "X" cannot be read as including basic customs duty, because such an interpretation would distort the prescribed calculation. The credit was therefore required to be worked out on the assessable value shown in the invoices.

Conclusion: The assessee's contention on inclusion of basic customs duty in "X" was rejected, and the excess credit was upheld.

Issue (ii): Whether penalty was imposable when the credit dispute arose from a legal interpretation and the credit was reflected in the statutory records.

Analysis: The dispute turned on interpretation of the credit formula and involved a technical legal question. The entire credit position was disclosed in the statutory records, and no mala fide intent was established. In such circumstances, penal action was not justified.

Conclusion: The penalty was set aside.

Final Conclusion: The demand arising from excess credit was sustained, but the penal consequence was removed, leaving the assessee partly successful.

Ratio Decidendi: Where a credit formula prescribes a specific base value, that base must be applied as written and cannot be expanded by implication; penalty is not sustainable when the dispute is one of bona fide legal interpretation fully reflected in statutory records.

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