Cenvat credit reversal for exempted goods cannot be overridden by a departmental demand for 8% payment under Rule 6(2).

Where a manufacturer uses Cenvat credit inputs in exempted goods cleared under a small-scale industry exemption, the assessee may choose either to reverse the input credit attributable to those goods or to pay duty on the exempted finished goods. The board instruction treated that choice as belonging to the assessee, not the revenue. Accordingly, departmental insistence on payment of 8% of the value of exempted goods under Rule 6(2) could not override a valid reversal of the credit. The proper course is to determine the exact quantum of credit required to be reversed and enforce that amount, with penalty consequences to be considered separately.

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Issues: Whether, where a manufacturer avails Cenvat credit and clears fully exempted goods under a small-scale industry exemption, the department can compel payment of 8% of the value of exempted goods under Rule 6(2) of the Cenvat Credit Rules, 2001 instead of accepting reversal of the credit attributable to inputs used in such exempted goods.

Analysis: The applicable board instruction clarified that the manufacturer using cenvatable inputs for exempted goods had an option either to reverse the credit on the inputs so used or to pay duty on the exempted finished goods. That choice was treated as resting with the assessee and not with the revenue authorities. Since the admitted position was that the assessee had opted to reverse the entire credit, the departmental insistence on recovery of 8% could not override that option. The proper course was to determine the exact quantum of credit required to be reversed and enforce that reversal, with penalty liability to be considered thereafter.

Conclusion: The demand for 8% payment could not be enforced against the assessee, and the matter was sent back for redetermination of the credit reversal required.

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