Revenue neutral CENVAT dispute: credit demand and penalty not sustainable where final-product duty offset the input credit taken.

After omission of the deemed manufacturer provision under Rule 12B of the Central Excise Rules, 2002, the assessee was no longer entitled to take CENVAT credit on inputs received thereafter. However, because duty paid on the final products was not less than the credit availed, the dispute was revenue neutral and caused no revenue loss. In such circumstances, recovery of the duty demand would serve no useful purpose, so the credit demand and consequential penalty were held not sustainable.

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Issues: Whether credit and duty demand could be sustained when the assessee, though not entitled to take credit after omission of the deemed manufacturer provision, had paid duty on the final products and the exercise was revenue neutral.

Analysis: The assessee had ceased to have the status of a deemed manufacturer after omission of Rule 12B of the Central Excise Rules, 2002, and therefore was not entitled to take credit on inputs received thereafter. However, the duty paid on the final products was not less than the credit availed on the inputs. In such circumstances, the entire exercise did not result in any revenue loss. Where the demand is revenue neutral, recovery of duty serves no useful purpose and the demand cannot be sustained.

Conclusion: The credit demand and consequential penalty were not sustainable.

Final Conclusion: The revenue challenge failed because the dispute was revenue neutral, and the order in favour of the assessee was maintained.

Ratio Decidendi: A duty or credit demand that is fully neutralized by duty already paid on the final products, and which causes no revenue loss, is not sustainable.

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