Reversal of CENVAT credit satisfies neutralisation even if in excess, barring collection based recovery for inter unit transfers.

Reversal of CENVAT credit on removal of inputs 'as such' requires reversal at least equal to credit availed and permits reversal in excess; such excess reversal satisfies the statutory neutralisation requirement and precludes recovery as an amount 'collected from a buyer' under collection-based recovery principles, making collection provisions inapplicable to inter unit transfers. Where the supplier's debit entries remain effective and not set aside or refunded, recipient units cannot be denied credit without causing double recovery, so denial is unsustainable. Penalties and extended limitation tied to alleged suppression or wrongful availment are unjustified on these facts and are therefore set aside.

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Issues: (i) Whether D-7 contravened Rule 3(5) of the CENVAT Credit Rules, 2004 by reversing excess credit while clearing inputs "as such" to sister units and whether such excess reversal attracts recovery under Section 11A read with Rule 14 or under Section 11D of the Central Excise Act, 1944; (ii) Whether denial of CENVAT credit to recipient units K-7 and E-8 is sustainable when D-7 has reversed the credit and such reversal has not been refunded or set aside; (iii) Whether extended period of limitation and penalties imposed on D-7, K-7 and E-8 are sustainable.

Issue (i): Whether D-7 contravened Rule 3(5) of the CENVAT Credit Rules, 2004 by reversing excess credit while clearing inputs "as such" to sister units and whether such excess reversal attracts recovery under Section 11A read with Rule 14 or under Section 11D of the Central Excise Act, 1944.

Analysis: Rule 3(5) (as in force for the relevant period) mandates payment of an amount equal to the credit availed when inputs are removed "as such"; it imposes a statutory obligation of neutralization by reversal equal to credit taken. The rule requires a minimum equal reversal but does not expressly prohibit reversal of a higher amount. Section 11D requires actual collection from a buyer representing duty; its ingredients (collection from a buyer and retention) are absent in inter-unit transfers within the same legal entity. Authorities cited by the Department (e.g., Inductotherm) are factually distinguishable where excess was collected from independent buyers. Prior decisions were considered that confined Section 11D to cases of collection from buyers and treated it as an anti-unjust enrichment provision rather than a general recovery provision.

Conclusion: In favour of Assessee. D-7 did not contravene Rule 3(5); reversal equal to or in excess of the credit originally availed satisfies the statutory requirement and Section 11D is inapplicable in the absence of collection from a buyer. The demand against D-7 is not sustainable.

Issue (ii): Whether denial of CENVAT credit to K-7 and E-8 is sustainable when D-7 has reversed the credit and such reversal has not been refunded or set aside.

Analysis: The preservation of the credit chain requires that where the supplier has paid duty (and such payment has not been set aside or refunded), the recipient cannot be denied credit. Judicial precedents establish that denial of recipient credit while retaining duty at supplier end results in double recovery and is contrary to the CENVAT scheme. The debit entries/invoices issued by D-7 were not set aside or refunded.

Conclusion: In favour of Assessee. Denial of CENVAT credit to K-7 and E-8 is legally unsustainable while the debit at D-7 remains effective.

Issue (iii): Whether extended period of limitation and penalties imposed on D-7, K-7 and E-8 are sustainable.

Analysis: Penalty provisions require wrongful availment, suppression, fraud, or willful misstatement. The facts show reversal (including excess reversal) based on internal accounting methodology and inter-unit transfers within the same company; there is no evidence of suppression, fraud, or collusion. Where substantive demands fail or the issue is interpretational, imposition of penalty is not warranted. Authorities support strict construction of penalty provisions and that penalties cannot survive where demand is unsustainable.

Conclusion: In favour of Assessee. Extended limitation and penalties imposed on D-7, K-7 and E-8 are unsustainable and are set aside.

Final Conclusion: The appeals filed by the assessee are allowed and the departmental appeal is dismissed; the substantive demands and associated penalties are set aside insofar as they are founded on the allegations considered in this order.

Ratio Decidendi: Rule 3(5) of the CENVAT Credit Rules, 2004 requires reversal of an amount equal to the credit availed when inputs are removed "as such" and does not prohibit reversal in excess of the credit originally availed; Section 11D of the Central Excise Act, 1944 applies only where an amount representing duty has been collected from an independent buyer and is therefore inapplicable to inter-unit transfers within the same legal entity.

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