Cenvat credit reversal: supplying inputs to contractors for use in the assessee's own manufacturing activity does not trigger reversal.

Whether Rule 3(5) of the Cenvat Credit Rules, 2004 required reversal of credit on explosives supplied to contractors for use in the appellant's own mines was examined; the governing principle applied is that reversal is mandated only where inputs are not used in or in relation to manufacture or are removed as such. Supplies to contractors for mine development and extraction used to produce the assessee's final product do not constitute removal of inputs, so Rule 3(5) does not apply and the credit need not be reversed; the impugned demand was set aside.

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Issues: Whether the appellant was required to reverse CENVAT credit availed on explosives supplied to contractors and used for extraction of coal in the appellant's own mines, invoking Rule 3(5) of the Cenvat Credit Rules, 2004.

Analysis: The explosives were supplied to contractors for use in the appellant's own mines under contract and were employed for extraction of coal that formed the appellant's final product. Under the statutory framework, recovery of credit is required where inputs are not used in or in relation to manufacture of final products or are removed as such. Where inputs are provided to service providers for use within the assessee's captive mines for mine development or extraction activities, such provision does not constitute removal of inputs as such. Prior tribunal decisions applying Rule 3(5) of the Cenvat Credit Rules, 2004 hold that supplying inputs and capital goods to contractors for use within the assessee's mines does not attract reversal of credit when those inputs are used for the assessee's manufacturing activity.

Conclusion: The provisions of Rule 3(5) of the Cenvat Credit Rules, 2004 are not attracted and the appellant was not required to reverse the CENVAT credit availed on the explosives; the impugned order is set aside and the appeal is allowed.

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