Cenvat credit on capital goods remains available after later exemption, if validly earned during dutiable manufacture.

Cenvat credit on capital goods validly taken during a period of dutiable manufacture remains available even if the assessee later opts for an area-based exemption and clears exempted final products. The settled principle applied is that credit once lawfully earned is indefeasible and cannot be reversed merely because the tax regime changes later, unless the credit was itself illegally or irregularly availed. The denial of recovery was therefore unsustainable and the exemption did not disentitle the assessee.

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Issues: Whether Cenvat credit on capital goods procured and used when the final products were being cleared on payment of duty could be denied merely because the assessee subsequently opted for area-based exemption and began clearing exempted goods.

Analysis: The capital goods were purchased and the credit was availed during a period when the assessee was manufacturing and clearing dutiable final products. The credit, once validly taken, could not be reversed merely because the assessee later shifted to an exemption regime. The rule relied upon by the Revenue did not justify denial of credit already accrued on capital goods acquired for use in dutiable manufacture. The settled principle applied was that credit validly earned is indefeasible and is not defeated by a later exemption, unless the credit itself was illegally or irregularly taken.

Conclusion: The credit was allowable for the period when the goods were dutiable, and the subsequent exemption did not disentitle the assessee. The disallowance was unsustainable.

Final Conclusion: The order denying recovery of the Cenvat credit was set aside and the assessee's appeal succeeded.

Ratio Decidendi: Cenvat credit validly taken on capital goods during a period of dutiable manufacture cannot be denied or reversed merely because the final products are later cleared under exemption.

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