Reversal of irregular Cenvat credit before notice can neutralise Rule 6(3) demand and interest liability.

Reversal of irregular Cenvat credit, coupled with payment of interest before issue of the show cause notice, was treated as restoring the position to one of non-availment of credit. On that basis, the demand under Rule 6(3) of the Cenvat Credit Rules, 2004 was found unsustainable because the adverse consequence of the original wrongful availment had been neutralised. The reasoning applied the earlier Modvat principle to the Cenvat regime and recognised that timely reversal removed the basis for recovery under Rule 6(3).

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Issues: Whether reversal of irregular Cenvat credit, along with payment of interest before issuance of the show cause notice, disentitled the department from invoking Rule 6(3) of the Cenvat Credit Rules, 2004 for recovery of the demand.

Analysis: The disputed credit had been reversed and interest had been paid before the show cause notice was issued. Such reversal was treated as placing the credit position at par with non-availment of credit, so the restrictions under Rule 6(3) were held not to survive for recovery purposes. The reasoning followed the principle that reversal of ineligible credit nullifies the adverse consequence of its original availment, and the earlier Modvat-based principle was applied to the Cenvat regime.

Conclusion: The demand under Rule 6(3) was not sustainable and the appeal succeeded in favour of the assessee.

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