CENVAT credit denial fails where excise duty was actually paid on clearances despite a manufacture dispute.

CENVAT credit cannot be denied or recovered merely because the department alleges that repacking and labelling did not amount to manufacture, where central excise duty had in fact been discharged on the clearances. The Tribunal applied prior rulings to hold that duty payment on the relevant clearances neutralised the basis for a further denial of credit, especially where the credit related to the same duty-paid stream of inputs and outputs. On that basis, the denial and recovery of CENVAT credit were held unsustainable and the impugned order was set aside.

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Issues: Whether CENVAT credit could be denied and recovered when the appellant had paid central excise duty on clearances, even though the department alleged that the activity undertaken did not amount to manufacture.

Analysis: The dispute turned on the effect of duty payment made on goods processed through repacking and labelling, where the activity was said to fall within deemed manufacture for some chapter headings and not for others. The Tribunal relied on earlier decisions holding that where duty has been discharged on the clearances, denial of credit cannot be sustained merely because the department asserts that the activity is not manufacture. The reasoning applied was that duty paid on such clearances neutralises the basis for a further demand or denial of credit, particularly where the credit taken is linked to the same stream of duty-paid inputs and outputs.

Conclusion: The denial and recovery of CENVAT credit were not sustainable, and the issue was answered in favour of the assessee.

Final Conclusion: The impugned order was set aside and the appeal was allowed because duty discharge on the relevant clearances defeated the demand for denial of CENVAT credit.

Ratio Decidendi: Where excise duty has in fact been discharged on the clearances, a demand to deny CENVAT credit cannot be sustained merely on the basis that the activity is alleged not to constitute manufacture.

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