Agree. If a player knocks the ball on and a player from the same team picks the ball up in front of where it was knocked on, he's offside and it's a pen.
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He's only offside if he's in front of the player who knocks on which he wasn't. He ran to collect the ball from an on side position presumably to gather the ball to stop England gaining the advantage. No penalty, the correct outcome would have been scrum England as there was no advantage from the knock on.
I agree that the downgrading to yellow is just to save face, the mitigation is overwhelming. Very unfortunate incident but Rugby is a brutal old game even when is keeps within the laws, glad that common sense has prevailed.