Cenvat credit on capital goods cannot be denied before installation is complete or trial production begins.

Rule 6(4) of the Cenvat Credit Rules, 2002 was not attracted where capital goods were still under installation and trial production had not commenced. On the facts recorded, exclusive use for manufacture of exempted goods was not established, so denial of cenvat credit at that stage was premature. The demand for reversal of credit and the penalty were therefore unsustainable, and the assessee succeeded.

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Issues: Whether Rule 6(4) of the Cenvat Credit Rules, 2002 was attracted to deny cenvat credit on capital goods when the plant and machinery were not yet fully installed and no trial production had commenced.

Analysis: The demand for reversal of credit was based on the assumption that the capital goods were being used exclusively for manufacture of exempted goods. However, the record showed that the plant and machinery were still on the verge of completion and had not even been put to trial production. On those facts, exclusive use after installation was not established, and denial of credit at the stage of incomplete installation was premature. The rule would become relevant only after installation, if the capital goods were in fact used exclusively for exempted manufacture.

Conclusion: Rule 6(4) was not attracted on the facts found, and the demand and penalty were unsustainable. The appeal was allowed in favour of the assessee.

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