The Chennai Regional Bench of the Customs, Excise & Service Tax Appellate Tribunal has clarified a critical aspect of Cenvat credit reversal under Rule 6(3) of the Cenvat Credit Rules, 2004, holding that export clearances under the DEPB scheme cannot be included in the valuation of exempted goods for credit reversal purposes. This ruling reinforces the principle that export-oriented manufacturing, even when involving exempted goods, qualifies for credit entitlement under statutory exceptions.
Background & Facts
The Dispute
The appellant, M/s. Sudhan Spinning Mills (P) Ltd., engaged in the manufacture of cotton yarn, availed Cenvat credit on capital goods and input services used in production. The company utilized common input services for manufacturing both dutiable and exempted final products. Under Rule 6(3) of the Cenvat Credit Rules, 2004, it was obligated to reverse the portion of Cenvat credit attributable to input services used in the manufacture of exempted goods. However, the appellant excluded the value of cotton yarn exported under the Duty Entitlement Pass Book (DEPB) scheme and goods cleared for job work from the computation of exempted goods, including only dutiable clearances in the reversal calculation.
Key Facts
- The appellant manufactured cotton yarn, some of which was exported under the DEPB scheme (Exemption Notification No. 30/2004-CE dated 09.07.2004)
- Other products were cleared for job work for further manufacture of grey fabric or doubling of yarn
- The appellant reversed Cenvat credit only on exempted goods excluding DEPB exports and job work clearances
- A Show Cause Notice dated 23.06.2015 was issued alleging improper exclusion of DEPB and job work values from exempted goods
- The Adjudicating Authority, by Order-in-Original No. 05/2017 dated 27.02.2017, confirmed the demand for additional reversal
- The First Appellate Authority, by Order-in-Appeal No. MAD-CEX-000-APP-003-2018 dated 29.01.2018, dismissed the appeal
Procedural History
- 23.06.2015: Show Cause Notice issued by the Department
- 27.02.2017: Order-in-Original passed by Adjudicating Authority confirming demand
- 29.01.2018: First Appellate Authority dismissed appeal
- 20.02.2026: Hearing before CESTAT Chennai Regional Bench
- 29.05.2026: Final Order passed by CESTAT
The Parties' Positions
The appellant contended that DEPB exports, being zero-rated under export incentives, should not be treated as exempted goods for the purpose of credit reversal. It further argued that job work clearances were already accounted for in the exempted goods category and inclusion would result in double counting.
The Revenue contended that any goods cleared without payment of duty, including DEPB exports and job work, fell within the definition of exempted goods under Rule 6(3) and must be included in the reversal computation.
Relief Sought
The appellant sought setting aside of the impugned order dated 29.01.2018, deletion of the demand for reversal of Cenvat credit on DEPB exports and job work clearances, and consequential relief as per law.
The Legal Issue
The central question was whether the value of cotton yarn cleared for export under the DEPB scheme and goods cleared for job work must be included in the value of exempted goods for the purpose of reversing Cenvat credit under Rule 6(3) of the Cenvat Credit Rules, 2004.
Arguments Presented
For the Appellant
The appellant relied on the decision of the Hon’ble High Court in M/s. Drish Shoes Ltd. and the subsequent ruling by the Chennai Bench of CESTAT in Sri Shanmugavel Mills (Ltd.) v. CGST & Central Excise (Final Order No. 41118/2025). It argued that Rule 6(6) of the CCR, 2004, explicitly provides an exception for goods exported under export incentive schemes, and such goods are not to be treated as exempted goods for credit reversal. The appellant further submitted ER-1 returns for January 2010 to September 2011, demonstrating that job work turnover was already reported and accounted for in the exempted goods category. Inclusion of these values again would amount to double jeopardy.
For the Respondent
The Revenue contended that any clearance without payment of duty, irrespective of the reason, constitutes an exempted good under Rule 6(3). It argued that DEPB exports, though incentivized, were still exempt from duty and therefore fell squarely within the scope of goods requiring credit reversal. The Department also challenged the admissibility of ER-1 returns submitted during the hearing, asserting that verification should have been conducted at the adjudication stage.
The Court's Analysis
The Tribunal examined the statutory framework under Rule 6(3) and Rule 6(6) of the Cenvat Credit Rules, 2004. Rule 6(6) provides an explicit exception: "Where the final product is exported under any export incentive scheme, the credit attributable to inputs and input services used in the manufacture of such final product shall not be reversed." The Tribunal emphasized that the High Court in Drish Shoes Ltd. had already held that an assessee manufacturing goods chargeable to nil duty is eligible to avail Cenvat credit if such goods are exported, and that such exports are not to be included in the computation of exempted goods for reversal purposes.
"In view of the above discussion, we hold that an assessee, manufacturing goods chargeable to nil duty, is eligible to avail CENVAT credit paid on the inputs under the exception clause to Rule 6(1), as contained in Rule 6(5) of CENVAT Credit Rules, 2002 and Rule 6(6) of CENVAT Credit Rules, 2004, used in the manufacture of such goods, if the goods are exported."
The Tribunal noted that the Sri Velayutham Spinning Mills and Sivaraj Spinning Mills decisions had consistently upheld this interpretation. The Revenue had not placed any contrary judgment to distinguish or overrule these precedents. Judicial discipline, the Tribunal held, compelled adherence to settled law.
Regarding job work clearances, the Tribunal accepted the appellant’s submission that ER-1 returns filed monthly with the Range Office, and available in the ACES portal, clearly reflected the turnover. The Department’s failure to verify these records at the adjudication stage could not be used to impose an additional burden at the appellate stage. Including job work values again would constitute double counting and violate the principle of natural justice.
The Verdict
The appellant succeeded. The Tribunal set aside the impugned Order-in-Appeal dated 29.01.2018 and allowed the appeal. The demand for reversal of Cenvat credit on the value of cotton yarn exported under the DEPB scheme and goods cleared for job work was deleted. Consequential relief, including refund of any amount paid, shall be processed as per law.
What This Means For Similar Cases
Export Incentive Clearances Are Not Exempted Goods for Credit Reversal
- Practitioners must now argue that goods exported under DEPB, EPCG, or other export incentive schemes are excluded from the definition of "exempted goods" under Rule 6(3) by virtue of Rule 6(6)
- Any demand for reversal based on inclusion of DEPB export value is legally unsustainable
- ER-1 returns and ACES data are admissible evidence for proving export turnover
Job Work Clearances Cannot Be Double-Counted
- Job work clearances must be treated as part of the manufacturing process, not as final exempted goods
- If such values are already reported in monthly returns and verified by the department, they cannot be re-included in the reversal computation
- Failure to verify records during adjudication precludes the department from raising the issue at appellate stage
Judicial Precedent Is Binding in Tax Appeals
- CESTAT benches are bound by earlier decisions of the same bench or higher courts on identical issues
- Revenue must produce contrary judgments to challenge settled law; silence amounts to acceptance
- Taxpayers should cite relevant CESTAT and High Court precedents proactively in appeals
