Input credit for exempted goods cannot be denied where the manufacturer complies with the prescribed payment mechanism.

A manufacturer producing both dutiable and exempted final products was held entitled to retain input credit once it complied with the prescribed 8% payment mechanism for common inputs. The Tribunal applied its earlier view that the rule operates on the status of the manufacturer, not on a separate classification of individual inputs, so compliance with the exempted-goods payment requirement satisfied the credit restriction. Credit could not be denied merely because certain inputs were used exclusively in exempted products. The demand, penalty, and interest were therefore unsustainable, and reversal of credit was not required.

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Issues: Whether credit taken on inputs exclusively used in the manufacture of exempted final products was liable to be denied and demanded when the manufacturer had also paid the prescribed amount in respect of common inputs used for both dutiable and exempted goods.

Analysis: The appeal turned on the effect of the earlier Tribunal view on the interaction between the rules governing credit and the obligation to pay 8% under the relevant exempted-goods mechanism. The Tribunal followed its earlier decisions and held that the obligation under the rule was attached to the category of manufacturer, not to a particular class of inputs. Once a manufacturer producing both dutiable and exempted final products complied with the prescribed payment mechanism, such compliance was treated as satisfying the requirement against availing credit in relation to exempted goods. The payment had no separate nexus with so-called exclusive inputs, and the credit could not be denied on that basis.

Conclusion: The demand, penalty, and interest were unsustainable; the credit was not liable to be reversed, and the appeal succeeded.

Ratio Decidendi: Where the governing rule deems compliance with the prohibition on credit upon fulfillment of the prescribed payment obligation by a manufacturer of both dutiable and exempted goods, credit cannot be denied merely because some inputs were used exclusively in exempted products.

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