Cenvat credit reversal before clearance preserves exemption benefit where exempted inputs are treated as not availed.

Cenvat credit attributable to exempted clearances, if reversed before removal of the goods, is treated as not having been availed for the purpose of the exemption condition. On that basis, the assessee satisfied the requirements of Notifications No. 29/2004 and 30/2004, and the benefit could not be denied merely because separate accounts were not maintained. Rule 6(3)(vi) of the Cenvat Credit Rules, 2002 was read consistently with the notifications, and timely reversal neutralised the initial availment of credit. The demand and penalty were therefore set aside, and the appeal was allowed with consequential relief.

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Issues: Whether the assessee was entitled to the benefit of Notifications No. 29/2004 and 30/2004 notwithstanding availing and subsequently reversing Cenvat credit on inputs used in the manufacture of dutiable and exempted goods, and whether Rule 6(3)(vi) of the Cenvat Credit Rules, 2002 required maintenance of separate accounts in the facts of the case.

Analysis: The credit attributable to the exempted clearances had been reversed before removal of the goods from the factory, and on that basis the situation was treated as one in which credit was not availed for the purpose of the exemption condition. The condition in the notification was therefore satisfied. The rule and the exemption notification were read consistently with the principle that reversal of credit neutralises the initial availment, and the benefit could not be denied merely because separate accounts had not been maintained when the credit stood reversed in time.

Conclusion: The issue was decided in favour of the assessee, and the denial of the notification benefit was unsustainable.

Final Conclusion: The demand and penalty were set aside and the appeal was allowed with consequential relief.

Ratio Decidendi: Where Cenvat credit attributable to exempted clearances is reversed before removal of the goods, the assessee is to be treated as having not availed such credit for the purpose of the exemption condition, and denial of the notification benefit is not justified.

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