CENVAT credit reversal on inputs cleared to a 100% EOU was held unsustainable where the transaction was revenue neutral.

Clearance of inputs as such to a 100% EOU against CT-3/CT-1 certificates was treated as covered by the export-clearance mechanism, and the Tribunal held that reversal of CENVAT credit was not payable on merits. It reasoned that such clearances could not be distinguished from comparable movements under the applicable notification and Rule 19(2), where duty-free clearance was permitted on the prescribed certificate. The Tribunal also held that the demand was time-barred because the transaction was revenue neutral: the recipient EOU could have taken equivalent credit or sought refund, so invocation of the extended period was unjustified.

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Issues: (i) whether inputs cleared as such to a 100% EOU against CT-3/CT-1 certificates without reversal of CENVAT credit were liable to duty reversal and demand; (ii) whether the demand was barred by limitation in view of revenue neutrality and the surrounding circumstances.

Issue (i): Whether inputs cleared as such to a 100% EOU against CT-3/CT-1 certificates without reversal of CENVAT credit were liable to duty reversal and demand.

Analysis: The clearance of inputs to the EOU was treated as comparable to clearance of capital goods as such, and the Tribunal considered the effect of the notification permitting clearance without payment of duty to EOUs on the strength of the prescribed certificate. The reasoning also relied on the principle that goods procured from the domestic market and goods imported for such clearance cannot be treated differently where CENVAT credit has been taken, and that Rule 19(2) supported clearance without duty in the circumstances.

Conclusion: The demand for reversal of CENVAT credit on merits was not sustainable and the issue was decided in favour of the assessee.

Issue (ii): Whether the demand was barred by limitation in view of revenue neutrality and the surrounding circumstances.

Analysis: The Tribunal held that the receiving EOU was eligible to take credit and that, even if credit were reversed at the supplier's end, the recipient could have taken equivalent credit or sought refund, leaving the situation revenue neutral. On that basis, invocation of the extended period was held unjustified, and the absence of separate discussion by the lower authority on limitation did not affect the result.

Conclusion: The demand was also unsustainable on limitation, and this issue was decided in favour of the assessee.

Final Conclusion: The Revenue's appeal lacked merit and stood rejected, with the assessee succeeding on both merits and limitation.

Ratio Decidendi: Where clearance to a 100% EOU is otherwise covered by the applicable exemption or export-clearance mechanism and the transaction is revenue neutral, a demand for reversal of CENVAT credit on inputs cleared as such and invocation of the extended period cannot be sustained.

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