CENVAT credit reversal for exempted goods lost in storage: input credit must be reversed even if the final product was not cleared.

CENVAT credit attributable to inputs used in manufacturing an exempted or nil-rated final product cannot be retained merely because the finished goods were lost, wasted during storage, or not physically cleared from the factory. The Court held that the credit scheme is intended to prevent cascading only for dutiable output, so duty-paid input credit must be proportionately reversed when those inputs are used for exempted manufacture. The manner of loss, including evaporation or storage wastage, did not change the character of the exempted product or justify retention of credit.

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Issues: (i) Whether CENVAT credit attributable to inputs used in the manufacture of rectified spirit, an exempted final product, had to be reversed when the finished product was lost as wastage during storage.

Analysis: The scheme of the CENVAT Credit Rules permits credit only to avoid cascading of duty on inputs used for dutiable final products. Where the final product is itself exempted or nil-rated, credit cannot be retained merely because the finished goods were not physically cleared from the factory. The nature of the loss, including evaporation or storage loss, does not alter the fact that duty-paid inputs were used to manufacture an exempted product. The reasoning that reversal is required only upon clearance was rejected, and the Court accepted that the credit attributable to such inputs had to be proportionately reduced.

Conclusion: The issue was decided in favour of Revenue and against the assessee; reversal of CENVAT credit was mandatory.

Final Conclusion: The appeals succeeded, the Tribunal's view was set aside, and the assessee was held liable to reverse the credit attributable to inputs used in the exempted product.

Ratio Decidendi: CENVAT credit cannot be retained on inputs used to manufacture an exempted or nil-rated final product merely because the finished goods were lost or not cleared; the credit must be reversed once such inputs are used for exempted manufacture.

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