CENVAT credit reversal for exempt goods cannot be applied retrospectively; refund rejection was unsustainable.

CENVAT credit validly taken before goods became exempt did not have to be reversed for the earlier period, because the obligation to reverse credit on exempted goods or inputs contained therein arose only on insertion of Rule 11(3) from 01.03.2007. That reversal requirement could not be applied retrospectively to a time when no such statutory bar existed. As the credit reversal was not legally required at the relevant time, rejection of the refund claim was unsustainable and the refund was admissible.

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Issues: Whether CENVAT credit taken prior to an exemption notification was required to be reversed when the goods later became exempt, and whether the subsequent refund claim was liable to be rejected.

Analysis: The credit had been validly taken when there was no statutory bar. The obligation to reverse credit in respect of exempted goods or inputs contained therein was introduced only by insertion of Rule 11(3) with effect from 01.03.2007. That provision could not be applied retrospectively to a period when no such requirement existed. Since the credit reversal was not legally required at the relevant time, the refund rejection was unsustainable.

Conclusion: The refund was admissible and the Revenue's challenge failed.

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