Cenvat credit need not be reversed on opting for exemption where inputs were validly credited before the product became exempt.

When an assessee opts for area-based exemption under Notification No. 50/2003-CE, Cenvat credit validly taken on inputs while the final product was dutiable is not required to be reversed merely because the product later becomes exempt. The same principle applies to credit relatable to inputs contained in work-in-progress and finished goods lying in stock at the time exemption is opted for. The reasoning follows the view that subsequent exemption does not retrospectively undo credit lawfully earned and utilised. On that basis, reversal was not exigible and denial of refund was unsustainable.

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Issues: Whether, on opting for area-based exemption under Notification No. 50/2003-CE, the assessee was required to reverse Cenvat credit attributable to inputs and inputs contained in work-in-progress and finished goods lying in the factory.

Analysis: The Cenvat credit scheme was applied on the basis that credit on inputs is taken at the time of receipt in the factory, when the final product was dutiable. The later withdrawal of duty or grant of exemption does not, by itself, create a requirement to reverse credit already validly taken and utilised. The jurisdictional High Court view relied upon in the order was that, once the inputs had suffered valid credit when the final product was dutiable, the Department could not insist on reversal merely because the product later became exempt. Following that principle, the credit attributable to inputs, work-in-progress, and finished goods lying in stock was not reversible on the date exemption was opted for.

Conclusion: The assessee was not required to reverse Cenvat credit on inputs or inputs contained in work-in-progress and finished goods on opting for the exemption; the denial of refund was unsustainable.

Ratio Decidendi: Cenvat credit validly taken when the final product was dutiable cannot be reversed merely because the product subsequently becomes exempt, and no reversal is exigible in respect of inputs already in stock, work-in-progress, or finished goods at the time of opting for exemption.

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