Cenvat credit reversal on exempted goods: penalty and interest set aside after 5% amount paid and appropriated

Cenvat credit rules require reversal equal to 5% of the value of exempted goods where input service credits are used for exempted clearances; the tribunal examined whether the 5% amount was reversed and found the respondent had paid and appropriated Rs.55,70,146. Revenue produced no evidence to the contrary, so the tribunal held the punitive interest and penalty equal to the amount paid were unsustainable and set them aside. The decision turns on reversal/apportionment of input service credit for exempted goods and proof of non-reversal.

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Issues: (i) Whether the appellant reversed Rs.55,70,146/- being 5% of the value of exempted goods in terms of Rule 6(3) of the Cenvat Credit Rules, 2004 and whether demand of interest and penalty could be sustained where such reversal was made on the same day after availment of credit.

Analysis: The issue requires examination of Rule 6(3) and Rule 6(5) of the Cenvat Credit Rules, 2004 and the scope of penalty under Section 11AC of the Central Excise Act, 1944. Relevant facts established are that the amount of cenvat credit on common inputs and input services was availed following an audit objection and that on the same date the appellant reversed the 5% amount representing value of exempted clearances in two instalments which were reflected in the cenvat records. No contrary evidence was produced to show that the reversal did not occur contemporaneously. Where credit is reversed in accordance with Rule 6(3) contemporaneously with availment following detection, interest and penalty founded on sustained non-reversal are not maintainable. The appellate determination must therefore focus on whether the statutory reversal requirement was met and whether imposition of interest and penalty remains justified in view of the contemporaneous reversal recorded in the cenvat account.

Conclusion: It is concluded that the appellant reversed Rs.55,70,146/- as required by Rule 6(3) of the Cenvat Credit Rules, 2004 on the same day the credit was availed following the audit objection. Consequently, confirmation of demand of interest and imposition of penalty under Section 11AC is not sustainable and is set aside. Appeal disposed accordingly in favour of the appellant on these aspects.

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