Cenvat credit reversal not required for selective exempt clearances when duty-credit inputs were not used in exempt manufacture.

Reversal of the entire Cenvat credit balance is not required where exemption is claimed only for specified clearances and the assessee has not used credit-availing inputs in the manufacture of exempted goods. The requirement to reverse credit attributable to inputs in stock, work in progress and finished goods arises only when a unit enjoys full exemption for all final products during the relevant period. On the facts stated, the exempted clearances were kept separate and the underlying substantive condition for exemption was satisfied, so the demand for full reversal was unsustainable and was set aside.

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Issues: Whether the assessee was required to reverse the entire Cenvat credit attributable to inputs, inputs in stock, work in process and finished goods when it availed exemption only for certain clearances and did not use credit-availing inputs in the manufacture of exempted goods.

Analysis: The requirement of reversing the balance of credit relatable to inputs in stock is attracted where a unit avails full exemption in respect of all final products manufactured during the relevant period. Where the assessee keeps the exempted-clearance inputs and the corresponding credit intact, and does not utilise duty credit for the manufacture of the exempted goods, the substantive condition underlying the exemption is satisfied. On the facts found, the assessee did not use credit-availing inputs for the exempt clearances and therefore the basis for demanding reversal of the entire balance was absent.

Conclusion: The demand for reversal of Cenvat credit was unsustainable and is set aside in favour of the assessee.

Final Conclusion: The appeal succeeded and the order confirming demand, interest and penalty was vacated.

Ratio Decidendi: Reversal of the entire Cenvat credit balance is not required where exemption is availed only for specified clearances and the assessee has not used credit-availing inputs in the manufacture of the exempted goods.

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