Cenvat credit reversal before SCN bars interest and penalty on reversed amount; limited recovery of inadmissible credit allowed.

Recovery of Cenvat credit and attendant interest and equal penalty were examined where part of the credit had been reversed prior to issuance of the show-cause notice. The reasoning finds that amounts reversed before the SCN cannot attract interest and equal penalty, and recovery notice should be limited to the outstanding balance; this precludes invoking extended limitation where the error arose from an erroneous interpretation of admissibility in a composite contract. The appellant may voluntarily pay the remaining inadmissible credit with interest; the impugned order was set aside and the appeal allowed.

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Issues: (i) Whether the demand of Cenvat credit of Rs. 3,38,796/-, interest and equal penalty could be sustained where Rs. 2,87,502/- had already been reversed prior to issuance of show-cause notice and the remaining disputed amount of Rs. 51,294/- arose from a composite contract containing an erection component for which credit is inadmissible.

Analysis: The appeal examines the scope of recovery where part of the allegedly inadmissible credit was reversed before issuance of the show-cause notice, the applicability of Section 11A(2) of the Central Excise Act, 1944 in confining recovery to the balance amount, and whether an erroneous interpretation of the Cenvat Credit Rules regarding a composite contract can be equated with an intention to evade duty so as to invoke extended period and penal provisions under Rule 14 and Rule 15(2) of the Cenvat Credit Rules, 2004. The admitted facts show that Rs. 2,87,502/- was reversed prior to notice; the balance demand relates to Rs. 51,294/- attributable to service tax on the erection component identified in the invoice; and the invoice represented a composite contract covering design, supply, installation, commissioning and erection. The legal position in Rule 2(l) of the Cenvat Credit Rules, 2004 excludes credit for erection services, yet a composite contract can give rise to an erroneous interpretation about admissibility of credit. Where reversal has already been made before initiation of proceedings, recovery should be confined to the un-reversed balance and imposition of interest and equal penalty contrary to Section 11A(2) requires scrutiny. An honest or arguable interpretation of the statutory provisions in relation to a composite contract does not amount to mala fide or intent to evade duty sufficient to justify invocation of extended period or confirmation of equal penal consequences.

Conclusion: The appeal is allowed. The order of the Commissioner (Appeals) confirming recovery, interest and equal penalty is set aside. The assessee may remit the admitted inadmissible credit of Rs. 51,294/- with interest voluntarily; penal confirmation and extended-period consequences are not sustained.

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