Conditional exemption notifications do not cause CENVAT credit to lapse; only absolute exemption triggers Rule 11(3)(ii).

Rule 11(3)(ii) of the CENVAT Credit Rules, 2004 applies only where the final product is exempted absolutely under Section 5A of the Central Excise Act, 1944. Where the exemption notifications are conditional, validly earned CENVAT credit does not lapse merely because the assessee operates under an exemption scheme and clears goods on duty payment while carrying forward the balance credit. On that construction, credit remained available for utilisation against duty on exported goods, and the view that such credit had lapsed was unsustainable.

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Issues: Whether the unutilized CENVAT credit could be treated as lapsed under Rule 11(3)(ii) of the CENVAT Credit Rules, 2004 in the case of goods cleared under conditional exemption notifications, and whether the rebate claims on exported goods were therefore liable to be rejected.

Analysis: Rule 11(3)(ii) applies where the final product has been exempted absolutely under Section 5A of the Central Excise Act, 1944. The exemption notifications involved were held to be conditional, not absolute, and the record showed that the petitioners had cleared goods by paying duty under one notification while availing credit on inputs, with the balance credit duly carried forward. The Court relied on the settled principle that validly earned credit is an indefeasible right and does not lapse merely because the assessee later operates under a conditional exemption scheme. On that construction, the departmental view that the credit had lapsed and could not be used for payment of duty on exported goods was unsustainable.

Conclusion: Rule 11(3)(ii) was held inapplicable, the carried-forward CENVAT credit was held not to have lapsed, and the rejection of the rebate claims was set aside.

Final Conclusion: The petition succeeded, and the rebate claims were directed to be sanctioned with interest.

Ratio Decidendi: Lapsing of CENVAT credit under Rule 11(3)(ii) is attracted only where the exemption is absolute; valid credit earned under a conditional exemption scheme remains available for utilisation and cannot be treated as lapsed in the absence of such absolute exemption.

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