CENVAT credit on fuel used for exempt goods was denied, while penalty and interest failed for lack of notice proposal.

CENVAT credit was held inadmissible on furnace oil used as fuel in the manufacture of exempted final products, because the credit restriction for inputs used in exempt goods continued to apply to fuel inputs despite the separate-accounting regime. The credit disallowance was therefore restored. Penalty and interest could not be imposed where the show cause notice did not propose either levy and the adjudicatory order also did not address them. On that basis, no penalty or interest was sustained.

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Issues: (i) Whether CENVAT credit on furnace oil used as fuel in the manufacture of both exempted and dutiable products was admissible. (ii) Whether penalty and interest could be imposed in the absence of a proposal in the show cause notice.

Issue (i): Whether CENVAT credit on furnace oil used as fuel in the manufacture of both exempted and dutiable products was admissible.

Analysis: The relevant excise credit scheme treated inputs used in exempted final products as outside the credit entitlement. The governing rule was held to apply to fuel inputs as well, and the exclusion of fuel from the separate-accounting regime did not create an entitlement to credit on fuel used for exempted goods. On the contrary, the legal effect of the rule denying credit on inputs used in exempted goods continued to operate for fuel inputs also.

Conclusion: The credit was not admissible on the quantity of furnace oil used in the manufacture of exempted goods, and the issue was decided against the assessee.

Issue (ii): Whether penalty and interest could be imposed in the absence of a proposal in the show cause notice.

Analysis: The notice did not propose levy of penalty or interest, and the adjudicatory order also did not cover that aspect. In these circumstances, the assessee could not be fastened with penalty or interest.

Conclusion: Penalty and interest were not payable, and this issue was decided in favour of the assessee.

Final Conclusion: The revenue appeal succeeded on the credit issue, the appellate orders were set aside, the original disallowance was restored, and no penalty or interest was sustained.

Ratio Decidendi: CENVAT credit is not available on fuel inputs used in the manufacture of exempted final products, and penalty or interest cannot be imposed unless such liability is proposed in the show cause notice.

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