CENVAT credit under SSI exemption lapses on merits, but recovery can fail where disclosures put the department on notice.

CENVAT credit remaining in balance on opting for a value-based SSI exemption lapses under Rule 11(2), and credit on common inputs used for exempt clearances cannot be retained where the exemption condition requires non-availment of credit on such inputs; on merits, the credit was therefore inadmissible. Recovery was nevertheless held time-barred because the opening balance, SSI exemption position, and related clearances were disclosed in monthly returns, putting the department on notice. The result was that, although the credit failed on merits, the demand could not be sustained due to limitation.

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Issues: (i) Whether the credit lying in balance as on 31.03.2010 and the credit availed during financial year 2010-11 was inadmissible under Rule 11(2) of the CENVAT Credit Rules, 2004 and the SSI exemption notification condition; (ii) Whether the demand for recovery of the credit was barred by limitation.

Issue (i): Whether the credit lying in balance as on 31.03.2010 and the credit availed during financial year 2010-11 was inadmissible under Rule 11(2) of the CENVAT Credit Rules, 2004 and the SSI exemption notification condition.

Analysis: The appellant was availing a value-based SSI exemption and had taken CENVAT credit on common inputs used for both exempted clearances and dutiable branded goods. Rule 11(2) provides that when a manufacturer opts for such exemption, the balance credit remaining after adjustment of credit relatable to inputs in stock, in process, or contained in stock must lapse. The notification condition also required non-availment of credit on inputs used for the exempt clearances up to the specified aggregate value. On that basis, the credit in question was held to be not admissible.

Conclusion: The credit was inadmissible on merits, and the finding was against the assessee.

Issue (ii): Whether the demand for recovery of the credit was barred by limitation.

Analysis: The relevant facts were disclosed in the monthly returns, including the opening balance of credit and the use of SSI exemption. The department was aware that the appellant was clearing exempted goods as well as branded dutiable goods, and the show cause notice was issued much later for recovery of credit availed in 2010-11. In these circumstances, the demand was held to be time-barred.

Conclusion: The demand was barred by limitation, and this issue was decided in favour of the assessee.

Final Conclusion: Although the credit was found inadmissible on merits, the appeal succeeded because the demand could not be sustained in view of limitation.

Ratio Decidendi: Where the material facts are disclosed in periodical returns and the department has knowledge of the relevant exemption and credit position, recovery of allegedly inadmissible credit cannot be sustained beyond limitation.

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