Cenvat credit reversal on inputs cleared as such to EOU and STP units was held unsustainable under Rule 3(5).

Cenvat credit reversal was examined under Rule 3(5) of the Cenvat Credit Rules, 2004, read with Notification No. 22/2003-CE, where inputs were cleared as such to 100% EOU/STP units. The Tribunal applied the later High Court interpretation of Rule 3(5) pari materia and noted that the rule covered such clearances without confining relief by reference to the procurement route assumed by the department. On that basis, it held that the assessee was not required to pay duty equal to the credit availed merely because the inputs were cleared to EOU/STP units. The demand for reversal/payment of credit was therefore unsustainable.

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Issues: Whether the appellant was required to reverse Cenvat credit or pay an amount equal to the credit taken when inputs were cleared as such to 100% EOU/STP units under the applicable exemption regime.

Analysis: The controversy arose under Rule 3(5) of the Cenvat Credit Rules, 2004, read with Notification No. 22/2003-CE dated 31.03.2003. The Tribunal noted that the earlier Larger Bench view had proceeded on a different statutory regime, while the later High Court ruling had interpreted the same Rule 3(5) as applying to both inputs and capital goods. Applying that ratio pari materia, the Tribunal held that inputs cleared as such to an EOU or STP unit did not attract the requirement to pay duty equal to the credit availed merely because the goods were not procured directly from the factory in the manner assumed by the department.

Conclusion: The demand for reversal/payment of Cenvat credit was unsustainable and the issue was decided in favour of the assessee.

Final Conclusion: The impugned order was set aside and the appeal was allowed with consequential benefits as per law.

Ratio Decidendi: Where inputs are removed as such under Rule 3(5) of the Cenvat Credit Rules, 2004, the liability turns on the scope of that rule as applied to the cleared goods, and the rule cannot be confined so narrowly as to deny credit reversal relief solely on the basis of the procurement route.

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