CENVAT credit on returned goods must be reversed when SSI exemption is opted and stock remains on hand.

When a manufacturer opts for small scale industry exemption, credit attributable to returned goods treated as inputs and lying in stock on that date must be reversed under Rule 11(2) of the Cenvat Credit Rules, 2004. Rule 16(1) of the Central Excise Rules, 2002 allows duty credit on goods returned for remaking, refining or re-conditioning, but that credit remains subject to reversal once the exemption option is exercised in respect of inputs in stock, in process, or contained in finished goods. Later clearances on payment of duty after crossing the exemption limit do not alter the reversal liability arising on the date of opting for exemption.

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Issues: Whether, on opting for small scale industry exemption, the manufacturer was required to reverse CENVAT credit in respect of returned stabilizers lying in stock on the date the option was exercised, where the returned goods had been treated as inputs under the credit scheme.

Analysis: Rule 16(1) of the Central Excise Rules, 2002 permits credit of duty paid on goods returned to the factory for being remade, refined or re-conditioned, and such returned goods are treated as inputs for CENVAT purposes. Rule 11(2) of the Cenvat Credit Rules, 2004 requires reversal of credit relatable to inputs lying in stock, in process, or contained in final products lying in stock on the date the exemption option is exercised. Since the returned stabilizers were already lying in stock when the exemption under Notification No. 8/2003-C.E. dated 01.03.2003 was opted for, the credit availed on those returned goods had to be reversed. The fact that some clearances were later made on payment of duty after crossing the exemption limit did not affect the liability arising on the date of opting for exemption.

Conclusion: The demand for reversal of CENVAT credit and the related interest was correctly confirmed and is upheld against the assessee.

Ratio Decidendi: When a manufacturer who has taken credit on returned goods treated as inputs opts for SSI exemption, credit attributable to such goods lying in stock on the date of option must be reversed under Rule 11(2) of the Cenvat Credit Rules, 2004.

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