Cenvat credit reversal on input services is not required when goods are cleared as such; related demand and penalty fail.

Rule 3(5) of the Cenvat Credit Rules, 2004 requires reversal only of credit availed on inputs or capital goods cleared as such, and does not extend to credit on input services. Rule 6 applies where inputs or input services are used for both dutiable and exempted supplies and separate records are not maintained, but its reversal mechanism concerns credit attributable to exempted goods or services. On that basis, credit already reversed for repair, insurance and rent-a-cab services could not justify further reversal of input service credit, and the connected demand and penalty were unsustainable.

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Issues: Whether credit of service tax paid on input services had to be reversed when inputs were cleared as such and whether the demand and penalty could be sustained.

Analysis: Rule 6 of the Cenvat Credit Rules, 2004 applies where inputs or input services are used for both dutiable and exempted goods or services and separate records are not maintained. The liability under Rule 6(3) and the computation under Rule 6(3A) relate to credit attributable to exempted goods or exempted services. Rule 3(5) deals with removal of inputs or capital goods as such and requires reversal only of the credit availed on such inputs or capital goods. It does not provide for reversal of credit taken on input services. The credit on repair, insurance and rent-a-cab services had already been reversed, and there was no legal basis to demand reversal of input service credit or to sustain the connected penalty.

Conclusion: The appellant was not required to reverse credit on input services under Rule 3(5), and the demand and penalty were unsustainable. The appeal was allowed.

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