Retrospective CENVAT reversal and successor credit transfer cannot be denied without clear legislative intent or supporting evidence.

Rule 11(3) of the Cenvat Credit Rules, 2004, inserted from 01.03.2007, was held not to operate retrospectively to require reversal of CENVAT credit where the final products had already become absolutely exempt; in the absence of express retrospective intent, the later reversal provision could not govern prior credit, so the demand for reversal, interest and penalties failed. Credit transfer to a successor unit under Rule 10(3) was also upheld where the entire business, assets and manufacturing operations had been transferred and the contrary allegation of non-transfer of inputs or capital goods was unsupported by evidence, so denial of the transferred credit was unjustified.

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Issues: (i) Whether Rule 11(3) of the Cenvat Credit Rules, 2004, inserted with effect from 01.03.2007, could be applied retrospectively to require reversal of CENVAT credit where the final products had become absolutely exempt earlier; (ii) Whether credit taken by the predecessor unit could be denied to the successor unit under Rule 10(3) of the Cenvat Credit Rules, 2004 on the ground that transfer of inputs or capital goods was not shown.

Issue (i): Whether Rule 11(3) of the Cenvat Credit Rules, 2004, inserted with effect from 01.03.2007, could be applied retrospectively to require reversal of CENVAT credit where the final products had become absolutely exempt earlier.

Analysis: Rule 11(3) specifically provides for reversal when the final product becomes absolutely exempt, but the sub-rule came into force only from 01.03.2007. In the absence of any express retrospective operation, a fiscal provision of this kind is presumed to operate prospectively. The record also showed that the relevant credit had been taken before the insertion of Rule 11(3), and the exemption in question was an unconditional exemption, not one based on value or quantity of clearances. The demand on this count was therefore not supported by the law applicable during the relevant period.

Conclusion: Retrospective application of Rule 11(3) was impermissible, and the demand for reversal of credit, along with interest and penalties on that basis, could not be sustained. The finding is in favour of the assessee.

Issue (ii): Whether credit taken by the predecessor unit could be denied to the successor unit under Rule 10(3) of the Cenvat Credit Rules, 2004 on the ground that transfer of inputs or capital goods was not shown.

Analysis: The transfer of the entire business, assets, liabilities, and manufacturing operations to the successor entity was undisputed. Rule 10 permits transfer of CENVAT credit on merger, amalgamation, sale, lease, or transfer of factory or business, subject to accounting for stock of inputs or capital goods to the satisfaction of the departmental authority. On the facts found, the allegation that such transfer was not established lacked evidentiary support, particularly when the entire unit had been taken over and operated from the same premises.

Conclusion: Denial of the transferred credit under Rule 10(3) was unjustified, and the demand on this ground also failed. The finding is in favour of the assessee.

Final Conclusion: The credit demands were unsustainable on both issues, and the impugned order was set aside with consequential reliefs.

Ratio Decidendi: A CENVAT credit reversal provision inserted later cannot be applied retrospectively in the absence of clear legislative intent, and credit transfer on amalgamation or business transfer cannot be denied where the transfer of the undertaking is established and the contrary allegation is unsupported by evidence.

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