Cenvat credit reversal for exempt paper goods was held unsustainable where common inputs were used for dutiable clearances too.

Rule 57AG(2) required reversal of Cenvat credit where a manufacturer opted for exemption on goods covered by the notification, but the rule could not be applied as a blanket reversal to all common inputs in a mixed-manufacture situation. Here, only one category of paper was exempted while other paper products continued to be cleared on duty, and the assessee used common inputs across exempted and dutiable goods. Because credit was already being reversed to the extent relatable to exempt clearances, the demand for reversal on inputs lying in stock and contained in finished goods was held unsustainable and set aside.

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Issues: Whether the manufacturer was required to reverse Cenvat credit on inputs lying in stock and contained in finished goods when it opted for exemption under Notification No. 3/2001 for only one category of paper while continuing to clear other paper products on payment of duty, using common inputs.

Analysis: Rule 57AG(2) required reversal of credit where a manufacturer opted for exemption from duty on the goods manufactured under a notification. The decisive consideration was that the assessee was manufacturing multiple varieties of paper, only one of which was covered by the exemption notification, while other paper products continued to suffer duty. Since common inputs were used across both exempted and dutiable products, and the assessee was reversing credit relatable to the exempted clearances, the blanket demand for reversal on all inputs lying in stock and contained in finished goods was not justified.

Conclusion: The demand for reversal of credit was unsustainable and was set aside in favour of the assessee.

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