Cenvat credit reversal is not required when duty-paid inputs are scrapped during manufacture and merely written off in accounts.

Cenvat credit did not require reversal merely because duty-paid inputs were written off in the accounts as rejected or scrapped during manufacture. The decisive factor was that the inputs had been issued for use in production and were damaged, rejected, or scrapped in the course of the manufacturing process, so the accounting write-off did not by itself show clearance of inputs as such. Contemporaneous records of line rejection and product non-conformity supported the explanation that the inputs were not removed intact from the factory. Credit reversal was therefore not warranted and denial of Cenvat credit was unjustified.

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Issues: Whether Cenvat credit was required to be reversed merely because inputs were written off in the accounts as rejected or scrapped during the manufacturing process.

Analysis: The disputed inputs had been received duty paid and issued for use in manufacture. The deciding consideration was whether the inputs were, in fact, put to their intended use. Once inputs are issued for manufacture and are subsequently damaged, rejected, or scrapped during the course of that process, the mere accounting write-off does not establish clearance of inputs as such. The contemporaneous accounting flow and product non-conformity records supported the explanation that these were line rejections arising in the manufacturing process.

Conclusion: Credit reversal was not warranted and denial of Cenvat credit was unjustified.

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