Cenvat credit reversal on removal of inputs as such follows the rule in force at removal; EOU exemption needs direct factory supply.

Inputs cleared to a 100% EOU against CT-3 certificate could not claim exemption under Notification No. 1/95-C.E. because the exemption required direct receipt of excisable goods from the factory of manufacture, and the goods had been purchased from the market after credit was taken. On removal of inputs as such, duty was not confined to the credit originally taken; under Rule 3(4) of the Cenvat Credit Rules, 2001, liability is the duty leviable on the date of removal, computed with reference to the applicable valuation rules. The penalty issue was treated as debatable, so no penalty was imposed.

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Issues: (i) whether inputs on which Modvat/Cenvat credit had been taken could be cleared without payment of duty to a 100% Export Oriented Unit against CT-3 certificate under Notification No. 1/95-C.E.; (ii) whether, on removal of such inputs as such, the duty payable was confined to the amount of credit initially taken or was to be computed on the basis of the duty and value applicable on removal; and (iii) whether penalty was imposable.

Issue (i): whether inputs on which Modvat/Cenvat credit had been taken could be cleared without payment of duty to a 100% Export Oriented Unit against CT-3 certificate under Notification No. 1/95-C.E.

Analysis: The exemption for procurement by a 100% EOU was conditional. One essential condition was direct receipt of excisable goods from the factory of manufacture. The assessee was not the manufacturer of the inputs and the goods had been procured by it from the market after availing credit. The clearance to the EOU was therefore not a direct procurement from the manufacturer, so the notification condition was not satisfied. The Tribunal also treated the earlier circular dealing with export of inputs under bond as inapplicable to such clearances to an EOU.

Conclusion: The inputs could not be cleared without payment of duty against CT-3 certificate, and the duty demand was upheld.

Issue (ii): whether, on removal of such inputs as such, the duty payable was confined to the amount of credit initially taken or was to be computed on the basis of the duty and value applicable on removal.

Analysis: The earlier Larger Bench view under the former rule structure was held not to govern the amended regime. Under Rule 3(4) of the Cenvat Credit Rules, 2001, removal of inputs as such attracts payment of an amount equivalent to duty leviable on such goods at the rate applicable on the date of removal and on the value determined under Section 4 or Section 4A of the Central Excise Act, 1944. The legal fiction of deemed manufacture did not prevent application of the amended valuation rule.

Conclusion: The duty was payable under the amended rule on the basis prescribed therein, and the contention that liability was automatically restricted to the amount of credit taken was rejected.

Issue (iii): whether penalty was imposable.

Analysis: The dispute turned on interpretation of the credit and removal provisions, and the Tribunal found that the issue had been subject to differing views.

Conclusion: No penalty was imposable.

Final Conclusion: The duty demand was sustained, but the assessee was granted relief from penalty, resulting in a partial allowance of the appeals.

Ratio Decidendi: Where inputs on which credit has been taken are removed as such, the liability is governed by the specific credit-rule provision in force at the time of removal, and exemption meant for direct procurement by a 100% EOU cannot be claimed when the goods are not received directly from the factory of manufacture.

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