Cenvat credit reversal not required for pre-2007 stock when exempt clearances were chosen later.

For the period before 01.03.2007, Cenvat credit on inputs contained in finished and semi-finished goods in stock was not required to be reversed merely because the assessee opted to clear final products under exemption notifications. Rule 11(3), which introduced such reversal liability, came into force only from 01.03.2007 and was not applicable to the dispute period. The settled principle applied was that validly availed Cenvat credit cannot be denied simply because the final product later becomes exempt, and direct co-relation between a particular input and the goods ultimately cleared was not required. The demand for reversal, interest, and penalty was therefore unsustainable.

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Issues: Whether, for the period prior to 01.03.2007, credit taken on inputs contained in finished goods and semi-finished goods lying in stock had to be reversed when the assessee opted for clearance of final products under exemption notifications.

Analysis: The liability to reverse an amount equivalent to Cenvat credit on inputs came into the Cenvat Credit Rules, 2004 only with the insertion of Rule 11(3) by Notification No. 10/2007-C.E. (N.T.) dated 01.03.2007. For the period in dispute, that provision was not in force. The Court applied the settled principle that validly availed Cenvat credit cannot be denied merely because the final product later becomes exempt, and that no direct co-relation between the particular input and the goods ultimately cleared is required. The authorities relied upon by the Revenue were held inapplicable on the facts and period involved.

Conclusion: The credit reversal demand, interest, and penalty were not sustainable and the issue was decided in favour of the assessee.

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