Cenvat credit reversal preserves exemption benefit where intermediate yarn is cleared for exempted fabric manufacture.

Reversal of the entire Cenvat credit attributable to inputs used in yarn neutralised the revenue's objection where that yarn was further used to make exempted fabrics. Applying earlier decisions, the Tribunal held that exemption under the notification could not be denied merely because the intermediate yarn was cleared without duty after such reversal. The demand for duty, interest and penalty was therefore not sustainable, and the assessee's appeal was allowed with consequential relief while the revenue's appeal was dismissed.

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Issues: Whether reversal of Cenvat credit attributable to inputs used in the manufacture of yarn and the further use of such yarn in the manufacture of exempted fabrics disentitled the assessee from the benefit of the exemption notification and justified confirmation of duty, interest and penalty.

Analysis: The Tribunal followed earlier decisions holding that once the assessee had reversed the entire Cenvat credit relatable to the inputs used in the final products, the exemption benefit could not be denied merely because the intermediate goods were cleared without payment of duty. The reasoning adopted in the earlier decisions was that reversal of credit neutralised the objection raised by the revenue and removed the basis for demanding duty, interest and penalty in the facts of the case.

Conclusion: The demand, interest and penalty were not sustainable. The assessee's appeal was allowed with consequential relief and the revenue's appeal was dismissed.

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