Cenvat credit survives conversion to a 100% export oriented unit; demand and penalties fail without a reversal rule.

Unutilised Cenvat credit lawfully taken on duty-paid inputs did not lapse when a domestic tariff area unit converted into a 100% export oriented unit, because the applicable Cenvat Credit Rules and Central Excise Rules contained no provision requiring reversal of valid credit merely on conversion. The earlier circular treating unutilised Modvat credit as lapsing was treated as inapplicable under the later statutory and transitional framework. As no rule mandated reversal of the credit balance, the demand based on that balance and the connected penalties could not be sustained.

---

---

Issues: Whether the unutilized Cenvat credit balance lying with a domestic tariff area unit lapses on conversion of the unit into a 100% export oriented unit, and whether demand of such credit along with penalties could be sustained.

Analysis: The credit had been validly taken on duty-paid inputs and the inputs were not removed as such from the factory on conversion into the export oriented unit. The applicable Cenvat Credit Rules and Central Excise Rules did not contain any provision barring a 100% export oriented unit from availing Cenvat credit or requiring a DTA unit to reverse valid credit merely because of conversion. The older circular treating unutilized Modvat credit as lapsing on conversion was held inapplicable in view of the later statutory regime and transitional provisions. In the absence of a rule requiring reversal of the credit balance, the foundation for the demand and the connected penalties did not survive.

Conclusion: The unutilized credit did not lapse on conversion, and the demand and penalties were unsustainable. The appeal was allowed.

---