CENVAT credit reversal after utilisation for exempt clearances defeats duty demand where the notification did not bar lawful credit use.

Notification No. 01/2011-CE barred availment of CENVAT credit on inputs or input services used for goods cleared under the exemption, but it did not prohibit use of correctly availed credit for payment of duty on those clearances. The assessee had not taken credit for inputs or input services linked to the concessional clearances; the objection was only to utilisation of otherwise admissible credit. That credit was later reversed with interest, and the reversal was treated as restoring the position as if no credit had been taken. The demand, interest and penalty were therefore unsustainable and were set aside.

---

---

Issues: Whether the demand of duty, interest and penalty was sustainable where credit availed on inputs/input services used for dutiable clearances was later reversed along with interest, in the context of Notification No. 01/2011-CE.

Analysis: The condition in the exemption notification bars taking credit on inputs or input services used in the manufacture of goods cleared under the notification. The finding was that the assessee had not taken credit in respect of inputs or input services used for the concessional clearances; the only objection was that credit lawfully availed for other clearances was utilised for payment of 2% duty. It was held that the notification did not prohibit utilisation of correctly availed credit for such payment. In any event, once the utilised credit was reversed with interest, the position was treated as if no credit had been availed, consistent with the settled principle on reversal of credit.

Conclusion: The demand, interest and penalty were unsustainable and were set aside.

---