Duty-paid inputs cleared as such after CENVAT reversal are not subject to duty-free exemption conditions or excise demand.

Duty-paid inputs removed as such after the CENVAT credit taken on them was reversed or otherwise made good were held outside the scope of Notification No. 22/2003-CE, because such goods retained their duty-paid character even when transferred to an export oriented unit. The conditions of a duty-free procurement exemption could not be applied to inputs on which duty had already been borne and for which credit had been duly neutralised. On that basis, the excise demand and penalty were unsustainable and were set aside.

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Issues: Whether excise duty demand and penalty were sustainable when duty-paid inputs, on which CENVAT credit had been availed and duly reversed or paid back on removal as such, were transferred to an export oriented unit without complying with the conditions of Notification No. 22/2003-CE.

Analysis: The transfer was of inputs on which duty had already been borne, as evidenced by the availment of CENVAT credit and the subsequent payment required by the CENVAT Credit Rules on clearance as such. Once the goods were duty-paid, they did not cease to have that character merely because they were supplied to an export oriented unit. The conditions attached to the exemption notification governing duty-free procurement were therefore inapplicable to such goods. The removal of inputs as such after making good the credit amount was outside the charge of central excise, and no breach attracting demand under the exemption notification could be sustained.

Conclusion: The demand and penalty were unsustainable and were set aside.

Ratio Decidendi: Duty-paid inputs removed as such after making good the CENVAT credit are not subject to the conditions of a duty-free exemption notification and do not attract excise demand or penalty under the Central Excise Act.

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