Broad CENVAT credit for trial-stage inputs upheld as demand on exempt clearances was found unsustainable

CENVAT credit on inputs used in trial production and reverse engineering was admissible because "in relation to manufacture" under Rule 3 of the CENVAT Credit Rules, 2002 was read broadly to cover materials consumed in the manufacturing process. Denial of credit on R&D inputs was therefore improper. The demand computed at 8% or 10% of exempted clearances was unsustainable because the show-cause figures were unreliable and were rebutted by the assessee through errors in clearance, input consumption, and stock treatment. Revenue's appeal failed and the adjudicating authority's order was affirmed.

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Issues: Whether CENVAT credit was rightly denied on inputs used in the R&D or trial stages of production, and whether the demand based on 8% or 10% of the value of exempted clearances was sustainable.

Analysis: Rule 3 of the CENVAT Credit Rules, 2002 allows credit on inputs used in, or in relation to, manufacture of final products. The expression in relation to manufacture was applied in its expansive sense to include inputs consumed in trial production and reverse engineering undertaken to obtain the desired cable, since such usage was connected with the manufacturing process and not outside it. The finding denying credit on R&D inputs was therefore held to be improper. On the demand towards 8% or 10% of exempted clearances, the factual computation in the show cause notice was found to be unreliable and was effectively rebutted by the assessee, including by pointing out errors in the clearance figures, input consumption figures, and stock treatment. The demand was accordingly held unsustainable.

Conclusion: The appeal by Revenue failed. The credit on trial-stage inputs was held admissible, and the demand of 8% or 10% of the value of exempted goods was set aside. The order of the adjudicating authority was affirmed and the Revenue appeal was rejected.

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