CENVAT credit on inputs later used for non-excisable goods and trading, r 6(3) reversal upheld; penalty set aside

Penalty under s 11AC read with r 15 of the CENVAT Credit Rules, 2004 was in issue where CENVAT credit had been taken on inputs/input services later attributable to manufacture of non-excisable goods and to trading. In the absence of any SCN allegation that the credits were barred under r 3 or that the inputs were, ab initio, exclusively meant for non-excisable goods, the only possible breach was retention after such deployment. Since r 6 permits retention upon reversal, and payment of the prescribed percentage of value of exempted goods sufficed under r 6(3), invocation of r 15(2) (and consequential s 11AC) was held untenable; the revenue appeal was dismissed.

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1. ISSUES PRESENTED AND CONSIDERED

(i) Whether, on confirmation of recovery of ineligible CENVAT credit under rule 14 of the CENVAT Credit Rules, 2004 read with section 11A of the Central Excise Act, 1944, the adjudicating authority was required to impose penalty under section 11AC read with rule 15 of the CENVAT Credit Rules, 2004, in the facts found.

(ii) Whether the record and the show cause notice disclosed the necessary ingredients to sustain penalty under section 11AC/rule 15, despite reversal/payment of the disputed amount and disclosure in returns, so as to justify interference with the finding dropping penalty.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i) & (ii): Imposability of penalty under section 11AC read with rule 15 when credit recovery is confirmed

Legal framework (as discussed by the Court): The Court treated recovery under rule 14 of the CENVAT Credit Rules, 2004 as being invoked through section 11A only in the event of "non-payment/short-payment" of duty, and noted that resort to such recovery provisions becomes relevant for penalty under section 11AC only where the circumstances and allegations establish the ingredients permitting invocation of that penalty provision.

Interpretation and reasoning: The Court found that the assessee had discharged its obligation under rule 6 of the CENVAT Credit Rules, 2004 by not retaining ineligible credit attributable to manufacture of non-excisable goods and trading activity before issuance of the show cause notice, and that the amount volunteered was appropriated though such appropriation was unnecessary once appropriate reversal had occurred. The Court further held that the show cause notice lacked tenable allegation, supported by evidence, of the necessary ingredients warranting penalty under section 11AC. It was also material that there was no allegation that the credits were barred under rule 3 of the CENVAT Credit Rules, 2004 or that the inputs were identifiable ab initio as meant only for manufacture of non-excisable goods; at best, the breach concerned retention after deployment. The Court accepted the impugned order's factual finding that the assessee had followed a wrong procedure due to mis-interpretation-confusing "exempted goods" with "non-excisable goods"-yet ended up paying more than what was legally required, had accepted the mistake, reversed the credit, and had reflected the reversals in monthly returns, negating mala fide intent. The Court also observed that proceedings under section 11A were "superfluous" on these facts except for the purpose of penalty, which could not be sustained absent the enabling circumstances.

Conclusions: The Court held the adjudicating authority's finding dropping penalty to be unassailable, and concluded that the challenge to non-imposition of penalty was untenable because (a) the show cause notice did not establish ingredients for section 11AC, and (b) the factual findings supporting absence of mala fides and prior reversal/payment were not effectively controverted. Accordingly, the appeal seeking imposition of penalty was dismissed as without merit.

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