Cenvat credit reversal on exempt final products upheld for inputs in stock, work-in-progress and finished goods.

Cenvat credit on inputs lying in stock, inputs in process and inputs contained in finished goods was not admissible once the final products became fully exempt from duty. Rule 6(1) of the Cenvat Credit Rules, 2004 was applied to bar credit on inputs used in the manufacture of exempted goods, and the later Supreme Court view was treated as overriding the earlier Larger Bench approach. On that basis, credit relatable to the exempt final products, including work-in-progress and finished stock, had to be reversed, and the demand for reversal was upheld.

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Issues: Whether Cenvat credit taken on inputs lying in stock, inputs in process, and inputs contained in finished goods had to be reversed when the final products became fully exempt from duty.

Analysis: The final products became exempted goods on the date the exemption notification took effect. Rule 6(1) of the Cenvat Credit Rules, 2004 embodies the principle that credit is not admissible on inputs used in the manufacture of exempted goods. The earlier Larger Bench view was held to be inconsistent with the later Supreme Court ruling which treated the prohibition in Rule 6(1) as governing all such inputs. On that basis, the credit relatable to inputs used in exempted final products, including inputs in process and inputs contained in finished stock, was not allowable and had to be reversed.

Conclusion: The demand for reversal of Cenvat credit was upheld and the appeal failed.

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