Cenvat credit on damaged inputs in manufacture is not reversible absent removal as such or specific statutory basis.

Cenvat credit was not required to be reversed where inputs were damaged inside the factory during the manufacturing process, because Rule 3(4) applied only to inputs removed as such and not to inputs consumed or damaged in manufacture. The reasoning treated inputs used in or in relation to manufacture as retaining credit eligibility absent a specific statutory basis for reversal, and remission provisions for goods lost or destroyed did not themselves create such liability. As there was no removal of inputs as such without duty, the demand for reversal failed, and the consequential penalty under Section 11AC was also unsustainable.

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Issues: Whether Cenvat credit was required to be reversed on inputs damaged during the manufacturing process, and whether penalty under Section 11AC could be sustained.

Analysis: The inputs were found damaged within the factory during manufacture of the final product, and the adjudicating authority itself accepted that the damage occurred in the course of manufacturing. Rule 3(4) was found applicable only where inputs are removed as such from the factory, not where inputs are consumed or damaged in the manufacturing process. The reasoning was supported by the principle that remission provisions governing goods lost or destroyed by natural cause or unavoidable accident do not, by themselves, create a requirement to reverse credit on inputs used in manufacture, and inputs so used are treated as having been used in or in relation to manufacture. Since there was no removal of inputs as such without duty and no legal basis for credit reversal, the demand and consequential penalty could not stand.

Conclusion: Cenvat credit reversal on the damaged inputs was not required, and the penalty was not sustainable.

Final Conclusion: The order setting aside the duty demand and penalty was upheld, and the Revenue's challenge failed.

Ratio Decidendi: Cenvat credit is not reversible merely because inputs are damaged during the manufacturing process within the factory, unless the inputs are removed as such or another specific statutory basis for reversal exists.

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