Nil-rated clearances as exempted goods bar Cenvat credit on inputs used in manufacturing blended yarn.

Cotton polyester blended yarn cleared to NHDC at nil duty under Notification No. 3/2001-CE was treated as exempted goods for Rule 6(1) of the Cenvat Credit Rules, 2001. The rule denies Cenvat credit on inputs used in manufacturing exempted goods, and its Explanation includes goods chargeable to nil rate of duty. Because the notification condition was fulfilled and the clearances were made under Section 5A of the Central Excise Act, the nil-rated quantity fell within exempted goods. Cenvat credit was therefore unavailable on inputs used to manufacture the yarn so cleared.

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Issues: Whether cotton polyester blended yarn cleared to NHDC at nil rate of duty under Notification No. 3/2001-CE was exempted goods for the purpose of Rule 6(1) of the Cenvat Credit Rules, 2001, so as to disentitle the assessee from Cenvat credit on inputs used in its manufacture.

Analysis: Rule 6(1) of the Cenvat Credit Rules, 2001 denies Cenvat credit on inputs used in the manufacture of exempted goods, and the Explanation to that rule treats goods chargeable to nil rate of duty as exempted goods. The blended yarn supplied to NHDC under Notification No. 3/2001-CE was cleared at nil rate of duty under Section 5A of the Central Excise Act, 1944, and the prescribed condition for the notification had admittedly been fulfilled. Such clearances therefore fell within the expression exempted goods for the purpose of Rule 6(1).

Conclusion: The assessee was not entitled to Cenvat credit on the inputs used in the manufacture of the quantity of blended yarn cleared to NHDC without payment of duty.

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