Cenvat credit on duty-paid inputs was valid after export condition failed, making reversal, interest and penalty unsustainable.

Where inputs procured duty-free for export manufacture under Rule 19(2) were later subjected to payment of duty and cess after the export condition could not be fulfilled, the restriction attached to the exemption arrangement no longer applied. The assessee was then entitled to use the inputs in the ordinary course of business and lawfully avail Cenvat credit on the duty and cess paid. As the credit was validly taken, the corresponding demand for reversal, together with interest and penalty, was unsustainable.

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Issues: Whether, after payment of duty and cess on inputs procured duty-free under Rule 19(2) of the Central Excise Rules, 2002 read with Notification No. 43/2001-C.E. (N.T.) dated 26-6-2001, the assessee was entitled to use the inputs in the ordinary course of business and avail Cenvat credit, and whether the demand of an amount equal to such credit, along with interest and penalty, was sustainable.

Analysis: The input had originally been procured without payment of duty subject to the condition that it would be used in the manufacture of export goods. When that condition could not be satisfied, the assessee paid the duty and cess otherwise leviable on the input in terms of the relevant rules and the bond executed for procurement. Once such duty and cess were paid, the input ceased to remain restricted by the export condition attached to the exemption arrangement, and the assessee became entitled to deal with it in the ordinary course of business. In that situation, availment of Cenvat credit on the duty and cess paid was held to be lawful. Since the credit was validly taken, the demand for reversal of an equivalent amount, together with consequential interest and penalty, could not be sustained.

Conclusion: The assessee was entitled to avail Cenvat credit on the duty and cess paid on the input, and the demand of equivalent credit amount, interest, and penalty was unsustainable.

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