Cenvat credit on capital goods for exempt intermediates is allowable when final products are duty-paid.

Cenvat credit on capital goods used to make exempt intermediate products remained admissible where those intermediates were captively consumed in the manufacture of final products cleared on payment of duty. The Tribunal followed CBEC circulars dated 3-4-2000 and 26-9-2002, which clarified that credit should not be denied merely because the intermediate product was exempt, so long as the final products were dutiable and duty-paid. On that basis, the demand for reversal of credit and the penalty were set aside.

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Issues: Whether Cenvat credit on capital goods used in the manufacture of exempt intermediate products was admissible when such intermediate products were captively consumed in the manufacture of final products cleared on payment of duty.

Analysis: The dispute turned on the effect of the CBEC circulars dated 3-4-2000 and Circular No. 665/56/2002-CX. dated 26-9-2002. These circulars clarified that credit should not be denied merely because the intermediate product was exempt from duty, so long as the intermediate product was used in the manufacture of final products that were themselves dutiable and cleared on payment of duty. The Tribunal applied this clarification to the admitted factual position that the final products were dutiable and that the credit related to capital goods used in the manufacture of the intermediate dies.

Conclusion: Cenvat credit was held admissible and the demand for recovery of credit and the penalty were set aside in favour of the assessee.

Final Conclusion: The appeal succeeded because credit could not be denied solely on the ground that the intermediate goods were exempt when the finished products were duty-paid.

Ratio Decidendi: Cenvat credit on inputs or capital goods used for exempt intermediate goods is allowable where those intermediate goods are captively consumed in the manufacture of dutiable final products cleared on payment of duty.

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