Cenvat credit for prototype manufacturers remains available despite long gaps in clearances, with duty paid on inputs cleared as such.

A registered manufacturing unit engaged in prototype vehicle manufacture remains entitled to Cenvat credit on inputs and capital goods even if final prototype clearances are infrequent or delayed, because receipt of inputs in the factory by a manufacturer satisfies the credit conditions under the Cenvat Credit Rules. Where inputs are cleared as such, reversal or duty payment equal to the credit taken is required, and compliance with that mechanism preserves the credit entitlement. A long gap between prototype clearances does not convert the unit into a trading concern, and credit under Rule 16 of the Central Excise Rules, 2002 remains available subject to duty payment on clearance. The denial of credit was therefore unsustainable.

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Issues: Whether a registered manufacturing unit engaged in prototype vehicle manufacture was entitled to avail Cenvat credit on inputs and capital goods during periods when final prototype vehicles were not cleared, and whether clearance of inputs as such on payment of duty converted the unit into a trading unit so as to deny credit.

Analysis: The unit was registered with Central Excise and was manufacturing prototype vehicles on payment of duty. Under Rule 2(k) of the Cenvat Credit Rules, inputs received in the factory of a manufacturer are eligible inputs, and under Rule 3 credit may be taken on receipt of inputs in the factory. If inputs are cleared as such, Rule 3(5) requires reversal or payment of duty equal to the credit, which was done in this case. A long interval in prototype manufacture does not change the character of the unit from manufacturer to trader. The unit was also entitled to avail credit in terms of Rule 16 of the Central Excise Rules, 2002, subject to duty payment when the goods were cleared.

Conclusion: The denial of Cenvat credit was unsustainable and the assessee was entitled to the credit.

Ratio Decidendi: A registered manufacturer does not lose entitlement to Cenvat credit merely because there is a long gap between clearances, if inputs are received in the factory and duty is discharged on inputs cleared as such.

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