CENVAT credit reversal not required when final product becomes unconditionally exempt; later lapse rule did not apply to the period in dispute.

Unconditional exemption of the final product did not, for the relevant period, require reversal of CENVAT credit. Rule 9(2) of the CENVAT Credit Rules, 2002 was treated as applicable to exemptions linked to value or quantity-based clearances, while the later Rule 11(3)(ii), providing for lapse of credit on absolute exemption under Section 5A of the Central Excise Act, 1944, applied only from 1-3-2007 and did not govern the dispute. Relying on earlier Larger Bench authority, the text states that credit need not be reversed merely because the final product becomes exempt, so the demand and penalties could not be sustained.

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Issues: Whether the assessee was required to reverse CENVAT credit when the final product became unconditionally exempt, and whether the credit available in the balance account or embedded in inputs, semi-finished goods, and finished stock could be demanded back for the relevant period.

Analysis: The dispute turned on the effect of unconditional exemption granted to the final product. The applicable provision during the relevant period was treated as Rule 9(2) of the CENVAT Credit Rules, 2002, which was read as applying where exemption was availed through a notification linked to value or quantum of clearances, and not where the final product became absolutely exempt. The later Rule 11(3)(ii), under which credit would lapse on absolute exemption under Section 5A of the Central Excise Act, 1944, was noted as a subsequent change effective from 1-3-2007 and therefore not governing the period in dispute. The issue was also considered settled by earlier Larger Bench authority holding that no legal requirement exists to reverse credit merely because the final product becomes exempt.

Conclusion: The assessee was not required to reverse the CENVAT credit for the relevant period, and the demand and penalties could not be sustained.

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