CENVAT credit reversal by duty payment on clearance is accepted on a revenue-neutral basis, though penalty may still apply.

Inadmissible CENVAT credit taken on inputs may be treated as effectively reversed where the same goods are later cleared on payment of duty after processing and value addition, because the duty payment is treated as substantively equivalent to reversal in a revenue-neutral situation. The article also notes that contravention of the credit provisions can still attract penalty despite that substantive adjustment. Accordingly, the credit dispute is treated as satisfied by the duty paid on clearance, while penal consequences remain available, though the penalty may be limited.

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Issues: Whether payment of duty on goods cleared after value addition, where the appellant had already availed CENVAT credit on the inputs, could be treated as reversal of the wrongly availed credit; and whether penalty was leviable for contravention of the credit provisions.

Analysis: The appellant had informed the department that manufacturing had ceased, retained inputs on which credit had been taken, and thereafter cleared the goods on payment of duty after processing and value addition. The credit availed on the inputs was held to be inadmissible because the activity undertaken did not amount to manufacture in the relevant sense. However, the duty paid at the time of clearance was treated as having the same effect as reversal of the credit, following the principle that where duty payment and credit availed are identical in substance, the situation is revenue neutral and separate reversal is not warranted. Since the appellant had contravened the statutory credit provisions, the levy of penalty was upheld, but limited in amount.

Conclusion: The demand for reversal of CENVAT credit was treated as satisfied by the duty payment made on clearance, but the appellant remained liable to penalty; the penalty was reduced to Rs. 10,000.

Final Conclusion: The credit dispute was resolved in substance in favour of the appellant, while penal consequences were retained in a reduced form.

Ratio Decidendi: Where inadmissible CENVAT credit is subsequently offset by duty paid on clearance of the same goods with value addition, the payment may be treated as reversal of the credit, especially where the transaction is revenue neutral, though penalty may still be imposed for breach of the credit rules.

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