Cenvat credit on job-work inputs need not be reversed when processed goods return duty paid and the transaction is revenue neutral.

Cenvat credit on inputs sent under job-work challans was not required to be reversed where the inputs were processed into PCB assemblies, returned to the manufacturer on payment of duty, and used in the final product. The duty paid by the job worker on the value attributable to the supplied inputs did not change the character of the movement as job work. In that setting, the manufacturer remained entitled to credit on the inputs and on the duty paid on the processed goods, and any reversal under Rule 3(5) would be offset by credit under Rule 3(6). The demand was therefore revenue neutral and unsustainable.

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Issues: Whether Cenvat credit taken on inputs sent under job-work challans was required to be reversed when the processed PCB assemblies were returned on payment of duty and the overall transaction was revenue neutral.

Analysis: The inputs were admittedly sent under Rule 4(5)(a) of the Cenvat Credit Rules for processing, and the components were fitted into PCB assemblies which were received back by the manufacturer for use in the final product. The duty paid by the job workers on the value attributable to the supplied inputs did not negate the character of the movement as job work. In such a situation, the manufacturer remained entitled to Cenvat credit on the inputs as well as on the duty paid on the processed goods, and any reversal under Rule 3(5) would only be offset by the credit available under Rule 3(6). The demand therefore did not result in any revenue loss and the finding of revenue neutrality supported rejection of the demand.

Conclusion: Reversal of Cenvat credit was not warranted, and the demand was unsustainable; the order of the Commissioner (Appeals) was set aside in favour of the assessee.

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