Cenvat credit reversal for unused inputs cleared as free replacement parts upheld; Rule 57F(3) held valid.

Cenvat credit was held to be a conditional concession, available only when inputs are used in the manufacture of final products. Because the inputs were cleared as free replacement parts without being so used, the statutory condition attached to the credit was not satisfied and the credit amount became payable by reversal or repayment. The challenge that Rule 57F(3) was ultra vires the Central Excise Act, 1944 was rejected, and the argument that the value of the free replacement parts had already been included in the product price was also not accepted. The demand and penalty were sustained.

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Issues: Whether duty was payable when inputs on which credit had been taken were removed as free replacement parts without being used in the manufacture of final products, and whether Rule 57F(3) was ultra vires the Central Excise Act, 1944.

Analysis: Cenvat credit is a concession available to a manufacturer subject to the prescribed conditions. The governing condition is that the inputs must be used in the manufacture of final products. Here, the inputs were cleared as free replacements and were not used in manufacture, so the condition attached to the credit was not satisfied. In that situation, the credit taken on the inputs was required to be reversed or paid back, and the expression used as duty or credit equivalent to duty did not alter the liability. The challenge to Rule 57F(3) as being beyond the Act was rejected, and the contention that the value of free replacement parts had already been included in the price of the air-conditioners was also not accepted.

Conclusion: The inputs cleared as such for free replacement attracted reversal/payment of the credit amount, and Rule 57F(3) was held to be valid.

Final Conclusion: The appeal failed on merits and the demand and penalty were sustained.

Ratio Decidendi: Where credit on inputs is availed as a concession, removal of those inputs without their use in manufacture defeats the statutory condition attached to the credit and makes reversal of the credit amount payable.

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