Cenvat credit reversal option for exempted goods cannot be replaced by an 8% recovery demand

Where a manufacturer uses cenvatable inputs in exempted goods, the Board's clarification recognises an option to reverse the credit attributable to those inputs or to pay duty on the exempted finished goods. The revenue cannot substitute that choice by insisting on an 8% recovery under Rule 6(2) when the assessee has elected to reverse the actual credit taken. The article states that the 8% demand was unsustainable and that the reversal option had to be enforced, with redetermination of the credit reversal and subsequent consideration of penalty.

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Issues: Whether, where a manufacturer avails credit on inputs used in exempted goods, the department can compel payment of 8% under Rule 6(2) of the Cenvat Credit Rules, 2001 instead of permitting reversal of the credit actually taken.

Analysis: The Board's clarification stated that in the case of a manufacturer using cenvatable inputs for exempted goods, the choice lies with the manufacturer either to reverse the credit attributable to such inputs or to pay duty on the exempted finished goods. That option is not one that the revenue can alter by insisting upon an 8% recovery. Since the assessee had opted to reverse the entire credit, the department was bound to enforce that course and could not substitute it with a demand under Rule 6(2).

Conclusion: The demand for 8% recovery was not sustainable, and the assessee was entitled to have the reversal option enforced; the matter was remanded for redetermination of the credit to be reversed and for consideration of penalty thereafter.

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