Reversal of exempted-credit share preserves captive-use exemption and Cenvat credit for mixed spirit manufacture.

Where common inputs or capital goods are used for both exempted rectified spirit and dutiable denatured spirit, reversal or payment of the credit attributable to the exempted clearances satisfies Rule 6 of the Cenvat Credit Rules, 2002 and the conditions of Notification No. 67/95-Central Excise. On that basis, molasses used captively in the manufacture of rectified spirit and denatured spirit remained eligible for the exemption, so the duty demand was unsustainable. For the same reason, Cenvat credit on capital goods, inputs and input services used in the ethanol plant could not be denied merely because the plant also produced exempted spirit, and the related demands of interest and penalty also failed.

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Issues: (i) Whether molasses used captively in the manufacture of rectified spirit and denatured spirit qualified for the benefit of Notification No. 67/95-Central Excise when the credit attributable to exempted rectified spirit was reversed or paid in terms of Rule 6 of the Cenvat Credit Rules, 2002. (ii) Whether the denial of Cenvat credit on capital goods, inputs and input services used in the ethanol plant was sustainable where the unit produced both exempted and dutiable spirits and the credit attributable to exempted production stood reversed.

Issue (i): Whether molasses used captively in the manufacture of rectified spirit and denatured spirit qualified for the benefit of Notification No. 67/95-Central Excise when the credit attributable to exempted rectified spirit was reversed or paid in terms of Rule 6 of the Cenvat Credit Rules, 2002.

Analysis: Notification No. 67/95-Central Excise grants exemption to an intermediate product captively consumed in the manufacture of excisable goods. The dispute turned on whether the exemption could still be claimed where rectified spirit, an exempted or non-dutiable product, emerged at an intermediate stage and a part of it was further used for manufacture of denatured spirit, which was dutiable. The Tribunal held that Rule 6 of the Cenvat Credit Rules, 2002 permits reversal of credit attributable to exempted products where common inputs are used for both exempted and dutiable final products. Since the appellants had reversed or paid the credit attributable to the exempted portion, the substantive condition for availing the notification stood satisfied.

Conclusion: The demand of duty on molasses was not sustainable and the benefit of Notification No. 67/95-Central Excise was available to the assessees.

Issue (ii): Whether the denial of Cenvat credit on capital goods, inputs and input services used in the ethanol plant was sustainable where the unit produced both exempted and dutiable spirits and the credit attributable to exempted production stood reversed.

Analysis: The denial was based on the view that the ethanol plant was used only for exempted production. The Tribunal found that the record, including the show cause notice, showed manufacture of both rectified spirit and denatured spirit. Once the assessee had discharged the obligation under Rule 6 by reversing the credit attributable to exempted production, credit could not be denied on the premise that the plant was exclusively engaged in exempted manufacture. The related demands of interest and penalty also could not survive.

Conclusion: The denial of credit, and the consequential demands of duty, interest and penalty, were unsustainable.

Final Conclusion: The common issue was resolved in favour of the assessees, and the orders-in-original were set aside with consequential relief.

Ratio Decidendi: Where common inputs or capital goods are used for both exempted and dutiable final products, reversal of the credit attributable to the exempted clearances satisfies the conditions for availing the statutory exemption and bars denial of credit on the ground of captive use alone.

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