Cenvat credit already validly taken cannot be recovered merely because the final product later became exempt from duty.

Rule 12 of the Cenvat Credit Rules, 2002 could not be used to recover credit that was validly taken and utilised when the rules then permitted it, even though the final product later became exempt from duty. The credit scheme did not require one-to-one correlation between specific inputs and the eventual dutiable output, and validly earned Cenvat credit was treated as indefeasible. The subsequent exemption of the final product did not authorise reopening of a lawful credit transaction, so the departmental demand was unsustainable.

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Issues: Whether Rule 12 of the Cenvat Credit Rules, 2002 could be invoked to recover credit already correctly taken and utilised, merely because the final product was subsequently exempted from duty.

Analysis: The credit on inputs was taken and utilised when the applicable rules permitted such availment and utilisation. The credit scheme does not require one-to-one correlation between particular inputs and the final dutiable product. Cenvat credit, once validly taken, is indefeasible, and subsequent exemption of the final product does not create a basis to reopen a lawful credit transaction. The rule relied upon by the department was therefore inapplicable to disturb credit already validly earned and used.

Conclusion: Rule 12 could not be applied to recover the credit. The demand was unsustainable and the assessee succeeded.

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