Cenvat credit already lawfully taken cannot be reversed merely because the final product later becomes exempt.

Credit validly taken under the Cenvat scheme was not required to be reversed merely because the final product later became exempt from duty. The court noted that legally and properly accrued credit remained available to the manufacturer unless it was illegally or irregularly taken, and the rules did not provide for divestment of such credit after subsequent exemption. Credit already taken and utilised on dutiable final products could not be withdrawn on that later change. Only inputs procured after exemption, where credit was not otherwise admissible, were treated differently, and the reversal demand was held unsustainable.

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Issues: Whether Cenvat credit lawfully taken on inputs and inputs used in finished goods was required to be reversed when the final product became exempt from duty subsequently.

Analysis: Credit validly taken under the Cenvat scheme is available to the manufacturer without limitation unless it is illegally or irregularly taken. The rules did not provide for reversal of such credit merely because the final product later became exempt. Once the credit had legally accrued and been utilised on dutiable final products, it could not be divested by subsequent exemption. Only inputs procured after the exemption, on which credit was otherwise not admissible because the final product was exempt, stood on a different footing.

Conclusion: The demand for reversal of the credit was unsustainable, and the issue was decided in favour of the assessee.

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