Cenvat credit on duty-paid glass bottles cannot be reversed merely because the bottles broke after clearance.

Duty-paid glass bottles used as inputs for filling aerated water remained eligible for Cenvat credit where duty was paid on the finished bottled goods under Section 4A of the Central Excise Act, 1944. Under the Cenvat Credit Rules, 2002/2004, credit is linked to inputs used in or in relation to the final product, so later breakage of the bottles after clearance did not justify reversal of credit. On that basis, proportional reversal and penalty could not survive once the inputs had already been used in manufacture.

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Issues: Whether Cenvat credit taken on duty-paid glass bottles was liable to be reversed when the bottles were later broken at the dealers' premises or at the assessee's unit, and whether any proportional reversal and penalty could survive.

Analysis: The bottles were received duty-paid and were admittedly used for filling aerated waters. Duty was also paid on the finished bottled goods under Section 4A of the Central Excise Act, 1944. On that factual foundation, the scheme of the Cenvat Credit Rules, 2002/2004 was held to permit credit only for inputs used in or in relation to the final product. Once the inputs had been used for manufacture, their subsequent breakage after clearance could not generate a demand for reversal of credit. Since the assessee appeal succeeded on this core issue, the Revenue's challenge to proportional reversal and penalty did not survive.

Conclusion: Reversal of Cenvat credit on the broken bottles was not permissible, and the assessee succeeded on the substantive issue; the Revenue's appeal failed.

Final Conclusion: The common order was set aside to the extent challenged by the assessee, and the Revenue's objection to proportionate credit reversal and penalty was rejected as having no surviving basis.

Ratio Decidendi: Where duty-paid inputs have been used in the manufacture of final products and duty has been discharged on the finished goods, their subsequent destruction after clearance does not justify reversal of Cenvat credit.

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