Revenue-neutral Cenvat credit reversal defeats duty demand where final packed goods were cleared on payment of duty.

Cenvat credit taken on pouches received from another unit could not support a duty demand where the credit was reversed at the time of clearance and duty was paid on the final pack of 55 pouches. Even if the packing activity did not amount to manufacture under Note 2 to Chapter 24, the alleged irregular credit caused no revenue prejudice because the duty burden on the cleared goods was fully discharged and the situation was revenue neutral. On that basis, the denial of credit and consequent demand were held unsustainable, and the impugned order was set aside.

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Issues: Whether the Cenvat credit availed on pouches received from another unit could be denied and duty demand sustained where the packing activity was alleged not to amount to manufacture, and the assessee had paid duty on the cleared pack of 55 pouches.

Analysis: The assessee received pouches from its other unit, added them to the existing pack, and cleared the final pack on payment of duty. Even assuming that the activity did not amount to manufacture under Note 2 to Chapter 24, the alleged wrong availment of credit did not prejudice the revenue because the credit taken in respect of the 5 pouches was reversed at the time of clearance. Duty was paid on the final product of 55 pouches, and the situation was revenue neutral. If credit had not been availed, the duty paid on the 5 pouches would not have been payable and would have been refundable.

Conclusion: The denial of credit and the consequent duty demand were unsustainable; the appeal succeeded and the impugned order was set aside.

Ratio Decidendi: When a disputed credit entry is fully neutralised and the final duty burden is discharged on the cleared goods, no sustainable duty demand can be upheld on the basis of a purely revenue-neutral irregularity.

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