Grey fabrics remain inputs for CENVAT credit despite an intervening dealer, making demand, interest and penalty unsustainable.

Grey fabrics purchased for further processing retained their character as inputs under Notification No. 35/2003-CE (NT), and the interposition of a registered dealer did not alter that status. The Tribunal treated the issue as settled by prior Tribunal and High Court authority and held that such fabrics were eligible for CENVAT credit in the hands of the dealer and processor. As the credit was available under the notification, the related demand, interest and penalty could not stand, and the impugned order was set aside.

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Issues: Whether grey fabrics held by a registered dealer were eligible as "input" for availing CENVAT credit under Notification No. 35/2003-CE (NT) dated 10.04.2003, and whether the credit demand, interest and penalty were sustainable.

Analysis: The applicable notification permitted credit on specified fabrics lying in stock or in process and on inputs contained in finished goods lying in stock. The reasoning adopted was that grey fabrics purchased for further processing retain their character as inputs; the introduction of a dealer between the manufacturer and the processor does not alter that nature. The issue was treated as no longer res integra in view of prior Tribunal and High Court decisions, and the view was that such grey fabrics are inputs in the hands of the dealer and processor for the purposes of the notification.

Conclusion: The appellant was entitled to avail credit under the relevant entry treating the grey fabrics as input. The demand of credit, interest and penalty could not stand.

Final Conclusion: The impugned order was set aside and the appeals were allowed.

Ratio Decidendi: Grey fabrics do not lose their character as inputs merely because a dealer intervenes between the manufacturer and the processor, and credit under the relevant transitional notification is available accordingly.

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