Cenvat credit reversal before removal can defeat excise duty demand where capital goods were never actually used.

Cenvat credit on capital goods received in a duty exemption area is not to be disallowed where the goods were unusable, were never put to use, and the credit entries were reversed before removal. The commentary stresses that mere book entry of credit is insufficient for recovery when the Revenue cannot show actual utilisation of the credit before reversal. It further states that, on those facts, excise duty could not be demanded on removal of the machines, particularly because the unit operated in a duty exemption area and was not the manufacturer of the machines.

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Issues: Whether disallowance of Cenvat credit and levy of excise duty were sustainable when capital goods were received in a duty exemption area, were not put to use, and the credit entries were reversed before removal.

Analysis: The machines had been received under invoices, were found unusable, and were removed from the factory after the appellant had reversed the credit entries in its records. The Revenue did not show that any credited amount had been actually utilized before reversal. In such circumstances, mere recording of credit did not justify disallowance when the credit was never availed in substance. As the unit operated in a duty exemption area and the appellant was not the manufacturer of the machines, recovery of excise duty on their removal was not permissible on the facts found.

Conclusion: The disallowance of credit and the demand of excise duty were not sustainable, and the issue was decided in favour of the assessee.

Ratio Decidendi: Where credit on capital goods has not been utilized and is reversed before removal, no excise duty demand can be sustained merely on the basis of book entries, especially in a duty exemption area.

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