Cenvat credit under Rule 6(3)(b) is unavailable where the process is not manufacture; penalty removed and demand remanded.

Rule 6(3)(b) of the Cenvat Credit Rules, 2004 does not apply where the disputed products arise from a process held not to amount to manufacture, because credit and the corresponding neutralisation mechanism operate only when there is a manufacturer producing dutiable or exempted final products. Goods that are merely excisable in tariff terms, but not manufactured, are not exempted goods for Rule 2(d) purposes, so credit cannot be claimed at the threshold. The penalty was set aside, and the demand was remanded for verification of the credit already reversed by the assessee and for recomputation accordingly.

---

---

Issues: (i) Whether Rule 6(3)(b) of the Cenvat Credit Rules, 2004 applied where the disputed products arose from processes held to be non-manufacture. (ii) Whether the penalty was sustainable and whether the amount already reversed by the assessee had to be given effect while quantifying the demand.

Issue (i): Whether Rule 6(3)(b) of the Cenvat Credit Rules, 2004 applied where the disputed products arose from processes held to be non-manufacture.

Analysis: The disputed goods were specified in the tariff and were excisable in that sense, but the credit scheme operates only where common inputs are used in the manufacture of dutiable and exempted final products. The definition of exempted goods under Rule 2(d) contemplates excisable goods exempted from duty, including nil-rated goods. Where no duty is leviable because the process itself does not amount to manufacture, the goods are not exempted goods within that definition. Rule 3 also permits credit only to a manufacturer or producer of final products, so where there is no manufacture, credit is not available at the threshold and cannot be neutralized by invoking Rule 6(3)(b).

Conclusion: Rule 6(3)(b) was held inapplicable, and the denial of Cenvat credit was sustained.

Issue (ii): Whether the penalty was sustainable and whether the amount already reversed by the assessee had to be given effect while quantifying the demand.

Analysis: The assessee claimed that it had already reversed a substantial amount of credit when clearing the goods and that such reversal should be accounted for while determining the demand. The record also showed that the procedure had been followed after intimating the Revenue. In these circumstances, the monetary adjustment required verification by the original authority, and the facts did not justify penal consequences.

Conclusion: The penalty was set aside and the matter was remanded for verification of the reversal claim and recomputation of the demand.

Final Conclusion: The credit denial was upheld, but the penalty was removed and the demand was sent back for fresh quantification after accounting for the reversed credit.

Ratio Decidendi: Cenvat credit and the corresponding neutralisation under Rule 6(3)(b) are available only where the final product answers the description of exempted goods in law and where the assessee is otherwise entitled to credit as a manufacturer; a process that does not amount to manufacture cannot be treated as an exempted final product for that purpose.

---