Cenvat credit reversal on switching to exemption does not attract penalty absent suppression or intent to evade duty.

Penalty under Rule 13(2) of the Cenvat Credit Rules, 2002 read with Section 11AC of the Central Excise Act, 1944 was found unsustainable where a unit switched from duty payment to exemption under Notification No. 50/2003-C.E. The controversy concerned whether Cenvat credit on inputs in stock and in semi-finished and finished goods had to be reversed before claiming exemption. As the credit liability had already been discharged after departmental intimation and the record did not show deliberate suppression or intent to evade duty, the non-reversal was treated as a matter of legal interpretation rather than contumacious conduct. The penalty was set aside.

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Issues: Whether penalty under Rule 13(2) of the Cenvat Credit Rules, 2002 read with Section 11AC of the Central Excise Act, 1944 was sustainable for failure to reverse Cenvat credit on inputs in stock and in semi-finished and finished goods before availing exemption under Notification No. 50/2003-C.E.

Analysis: The liability to reverse the credit had already been discharged after departmental intimation and the underlying controversy related to the applicability of the credit reversal requirement on a unit switching from duty payment to exemption. The facts did not show deliberate suppression of material facts or an intention to evade duty. In these circumstances, the non-reversal before the departmental advice was treated as an issue of interpretation of the legal provisions rather than contumacious conduct attracting penal consequences.

Conclusion: Penalty under Rule 13(2) of the Cenvat Credit Rules, 2002 read with Section 11AC of the Central Excise Act, 1944 was not sustainable and was set aside in favour of the appellant.

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