Cenvat credit on duty-paid inputs survives withdrawal of exemption conditions and is not barred by Rule 3(2).

Cenvat credit remained available on duty-paid inputs lying in stock, in process, or contained in finished goods when the final product ceased to be exempted or the exemption condition was withdrawn. The later notification removed the earlier condition against availing input credit and increased the effective duty, while Rule 3(1) independently permitted credit on duty-paid inputs used in manufacture of excisable final products. Rule 3(2) did not bar the claim on the admitted facts, because the inputs were duty paid and used in relation to the final product. The denial of credit was therefore unsustainable.

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Issues: Whether the appellant was entitled to avail Cenvat credit on duty-paid inputs lying in stock, in process, or contained in finished goods as on 1-3-2003, and whether Rule 3(2) of the Cenvat Credit Rules, 2002 barred such credit after the exemption rate was altered by the later notification.

Analysis: The exemption granted under Notification No. 10/2002-C.E. allowed clearance of the final product at a concessional rate subject to non-availment of credit on inputs. Notification No. 10/2003-C.E. later increased the effective duty and removed the condition against taking Cenvat credit, thereby withdrawing the earlier concession to that extent. The statutory scheme in Rule 3(2) preserved credit on inputs lying in stock, in process, or contained in final products on the date when goods cease to be exempted or become excisable, while Rule 3(1) independently allowed credit on duty-paid inputs used in manufacture of excisable final products. On the admitted facts, the inputs were duty paid and were used in relation to the appellant's final product.

Conclusion: The appellant was entitled to Cenvat credit, and Rule 3(2) did not bar the claim. The denial of credit was unsustainable and the appeals succeeded.

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