2026 (4) TMI 210 - AT - Central Excise

Removal of inputs as such is not trading activity; penalty also fails absent fraud, suppression or intent to evade.

Removal of inputs as such was treated as a clearance governed by Rule 3(5) of the CENVAT Credit Rules, 2004, not as trading activity, so reversal under ... Penalty under CENVAT Credit Rules - removal of inputs - trading activity so as to attract reversal under Rule 6(3) of the CENVAT Credit Rules, 2004 - availing CENVAT Credit on inputs, input services and capital goods under the CENVAT Credit Rules, 2004 [CCR, 2004] - Absence of suppression or intent to evade - Pre-SCN payment of duty and interest. Penalty under CENVAT Credit Rules - HELD THAT:- The Tribunal held that the surviving controversy was only as to penalty, since the confirmed amount for 2012-13 had already been paid with interest before issuance of the show cause notice and stood appropriated in adjudication. On examining the record, the Tribunal found no material showing misstatement, suppression of facts, fraud, collusion or any intent to evade payment of duty. In the absence of these ingredients, penalty under Rule 15 of the CENVAT Credit Rules, Rule 25 of the Central Excise Rules and section 11AC could not be sustained. As the demand with interest had already been discharged, no further amount was recoverable from the assessee. [Paras 15, 16, 17, 18] The penalty was set aside and, the duty and interest having already been paid and appropriated, no further demand survived. Final Conclusion: The Tribunal allowed the appeal by setting aside the impugned order to the extent it sustained penalty. Since the confirmed amount for 2012-13 had already been paid with interest prior to the show cause notice and no suppression or intent to evade was established, no further liability could be fastened on the assessee. Issues: (i) Whether removal of inputs as such could be treated as trading activity so as to attract reversal under Rule 6(3) of the CENVAT Credit Rules, 2004. (ii) Whether penalty could be sustained when the duty and interest stood paid before issuance of the show cause notice and no ingredients of fraud, suppression, collusion or wilful misstatement were established.Issue (i): Whether removal of inputs as such could be treated as trading activity so as to attract reversal under Rule 6(3) of the CENVAT Credit Rules, 2004.Analysis: The applicable framework was Rule 3(5) of the CENVAT Credit Rules, 2004, which requires reversal of credit only when inputs or capital goods on which credit has been taken are removed as such from the factory. On that basis, removal of inputs as such does not assume the character of trading activity. The adjudicatory reasoning accepted this distinction and treated such clearances as outside the scope of Rule 6(3) of the CENVAT Credit Rules, 2004.Conclusion: The issue was decided in favour of the assessee, and the demand linked to treating clearances of inputs as such as trading activity was not sustainable.Issue (ii): Whether penalty could be sustained when the duty and interest stood paid before issuance of the show cause notice and no ingredients of fraud, suppression, collusion or wilful misstatement were established.Analysis: Penalty under Rule 15 of the CENVAT Credit Rules, 2004, Rule 25 of the Central Excise Rules, 2002 and Section 11AC of the Central Excise Act, 1944 requires the presence of culpable circumstances such as fraud, suppression of facts or intent to evade duty. The record showed payment of the confirmed amount with interest before issuance of the notice and no material indicating the requisite mens rea. In those circumstances, the penalty could not survive.Conclusion: The issue was decided in favour of the assessee, and the penalty was set aside.Final Conclusion: The impugned order did not survive judicial scrutiny, and the appeal succeeded with consequential relief as per law.Ratio Decidendi: Where inputs are removed as such, only the credit taken on those inputs is reversible and such removal cannot be equated with trading activity for invoking Rule 6(3); further, penalty under the excise credit and penalty provisions is not attracted in the absence of fraud, suppression or intent to evade, especially where duty and interest have already been paid before notice.