Proportionate CENVAT credit reversal for exempted final products defeats demand on exempt clearances.

Where CENVAT credit was validly taken on inputs when the final goods were dutiable, later exemption of those goods did not justify an 8% demand once the assessee reversed the proportionate credit attributable to the exempted final products. The reversal was treated as legally effective, supported by the retrospective amendment in Section 68 of the Finance Act, 2010 and the Supreme Court principle that such reversal cures the liability otherwise arising on exempt clearances. On that basis, the demand was held unsustainable.

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Issues: Whether demand of 8% of the value of exempted goods was sustainable when the assessee had taken credit when the goods were dutiable and had reversed the proportionate credit attributable to the inputs used in the exempted final products.

Analysis: The credit was lawfully availed when the goods were dutiable. When the same goods later became exempt, the assessee reversed the credit relatable to the inputs used in the exempted goods. Such reversal was held to be legally valid. The decision also relied on the retrospective amendment introduced by Section 68 of the Finance Act, 2010 and the principle recognized by the Supreme Court that reversal of credit attributable to exempted goods cures the liability that would otherwise arise.

Conclusion: The demand was not sustainable and the Revenue's appeal failed.

Final Conclusion: Reversal of proportionate CENVAT credit attributable to exempted final products protected the assessee from the proposed payment demand, resulting in dismissal of the Revenue's challenge.

Ratio Decidendi: Where credit validly taken on inputs is proportionately reversed in respect of exempted final products, the assessee is not liable to pay the amount demanded on the basis of such exempt clearances.

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