Reversal of unutilised input credit preserves exemption eligibility and removes the related duty demand and penalty

Under an exemption-conditional regime, credit taken on inputs does not defeat the exemption where the credit is reversed before utilisation; on those facts, the assessee is treated as not having availed the credit and the notification condition remains satisfied. The resulting denial of exemption could not stand, so the duty demand based on that denial was set aside. Once the demand failed, the related issues of cum-duty benefit and penalty also ceased to survive, restoring the exemption benefit and eliminating the consequential revenue objections.

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Issues: Whether the assessee was entitled to exemption under Notification No. 30/04-CE despite having taken Cenvat credit on inputs which was reversed before utilisation, and whether the consequent duty demand and connected penalty and cum-duty issues could survive.

Analysis: The exemption was subject to the condition that no input credit should be taken. The assessee had taken credit on packing material, but the credit was not utilised and was reversed immediately on being pointed out by the Department. In such circumstances, the assessee was to be treated as not having availed the credit. The condition in the notification was therefore satisfied on the facts, and the denial of exemption could not be sustained. Once the duty demand based on denial of exemption failed, the connected issues relating to cum-duty benefit and penalty did not survive.

Conclusion: The assessee was entitled to the exemption, and the duty demand based on its denial was set aside. The connected revenue objections on cum-duty benefit and penalty also failed.

Final Conclusion: The appeals by the assessee succeeded and the revenue appeals were dismissed, with the exemption benefit restored and the consequential demands and penalties set aside.

Ratio Decidendi: Where credit taken under an exemption-conditional regime is reversed before utilisation, the assessee is to be treated as having not availed the credit for the purpose of the exemption condition.

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