Cenvat credit reversal and refund principles: valid credit cannot be withdrawn after exemption, and mistaken payment was refundable.

An exemption notification barred availment of its benefit where Cenvat credit had been taken, but it did not provide any mechanism to reverse valid credit already earned and utilised. The controlling principle applied was that lawfully availed Cenvat credit is indefeasible and cannot be divested merely because the final product later becomes exempt, absent an express statutory provision. On that basis, the amount paid under a mistaken understanding of law was refundable, and the demand denying refund was unsustainable.

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Issues: Whether the amount paid by the assessee under a mistaken understanding of law, in the context of an exemption notification, was refundable or liable to be retained on the theory of reversal of Cenvat credit on inputs, work-in-progress and finished goods.

Analysis: The notification only barred availment of its benefit where Cenvat credit had been taken; it did not create a mechanism for reversing valid credit already earned and utilized. The controlling principle applied was that validly taken Cenvat credit is indefeasible and, once lawfully availed, cannot be divested merely because the final product subsequently becomes exempt. The earlier view relied on by the Revenue was not followed because the later decision, upheld by the Supreme Court, had already settled that credit on inputs available up to the date of exemption does not stand reversed in the absence of a statutory provision.

Conclusion: The assessee was entitled to refund of the amount paid under mistake of law, and the demand sustaining denial of refund was unsustainable.

Final Conclusion: The impugned order was set aside and the appeal was allowed with consequential relief.

Ratio Decidendi: Valid Cenvat credit already taken and utilized cannot be reversed merely because the final product later becomes exempt, unless the statute expressly provides for such reversal; amount paid under a mistaken understanding of law is refundable when no recovery mechanism exists.

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