Cenvat credit on inputs for exempted goods cannot be recovered again after reversal with interest.

Inputs used exclusively in the manufacture of exempted final products fall within Rule 6(1) of the Cenvat Credit Rules, 2002, which bars availment of credit on such inputs. Rule 6(2) was therefore wrongly invoked where no inputs were used for dutiable clearances. Once the credit had been reversed with interest, no further demand could survive in relation to the exempted clearances, and the proposed recovery under Rule 6(3) lacked legal foundation. The impugned demand and consequential action were held unsustainable, and the assessee succeeded.

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Issues: Whether Cenvat credit taken on inputs used exclusively in the manufacture of exempted final products could be denied or recovered under Rule 6(2) and Rule 6(3) of the Cenvat Credit Rules, 2002, when the credit had already been reversed with interest.

Analysis: The inputs in question were found to have been used only in the manufacture of exempted products and not in any dutiable final products. On that footing, Rule 6(2) was wrongly invoked, as the situation was covered by Rule 6(1), which prohibits availment of credit on inputs relatable to exempted final products. Once the entire credit had been reversed with interest, no further demand could survive with reference to the exempted clearances. The demand under Rule 6(3), therefore, lacked legal foundation.

Conclusion: The demand was not sustainable and the issue was decided in favour of the assessee.

Final Conclusion: The impugned demand and consequential action could not be sustained, and the appeal succeeded.

Ratio Decidendi: Where inputs are used exclusively for exempted final products, the case falls under Rule 6(1) and not Rule 6(2) of the Cenvat Credit Rules, 2002, and reversal of the credit with interest negatives any further demand under Rule 6(3).

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