Cenvat credit and Rule 6 liability turn on receipt date and separate accounts for exempt clearances.

Cenvat credit on capital goods was held to depend on the date of receipt in the factory; where the goods were received and used exclusively for exempt final products, later conversion of the final product into a dutiable one did not revive the lost credit entitlement, so the capital goods demand was sustained. By contrast, the 8% amount under Rule 6(3)(b) could not be demanded where the manufacturer maintained separate accounts and substantially complied with Rule 6(2); that provision applies only when separate accounts are not maintained. The major Rule 6 demand was therefore set aside, while the capital goods credit issue failed.

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Issues: (i) Whether Cenvat credit on capital goods received and installed during a period when the final product was exempt could be availed after the final product became dutiable. (ii) Whether the assessee was liable to pay 8% of the value of exempted clearances for failure to maintain separate accounts under Rule 6 of the Cenvat Credit Rules, 2002.

Issue (i): Whether Cenvat credit on capital goods received and installed during a period when the final product was exempt could be availed after the final product became dutiable.

Analysis: Rule 4(2)(a) was read harmoniously with Rule 3(1) and Rule 6(4) of the Cenvat Credit Rules, 2002. The right to capital goods credit was held to arise with reference to the date of receipt of the capital goods in the factory. If, on that date, the capital goods were used exclusively for exempted final products, later emergence of dutiability did not revive the lost entitlement. The earlier Tribunal and Supreme Court authorities on the relevant date for capital goods credit were followed.

Conclusion: The issue was decided in favour of the Revenue. Credit on the capital goods was not admissible after 28-2-2003, and the demand of Rs. 29,40,702/- was sustained.

Issue (ii): Whether the assessee was liable to pay 8% of the value of exempted clearances for failure to maintain separate accounts under Rule 6 of the Cenvat Credit Rules, 2002.

Analysis: Rule 6(2) required separate accounts for inputs used in dutiable and exempted goods, while Rule 6(3)(b) applied only where the manufacturer opted not to maintain such accounts. On the record, the assessee maintained distinct ledger accounts and substantially complied with the accounting requirement. The demand under Rule 6(3)(b) could not be sustained merely because some credit had been wrongly taken and later reversed, since the demand was not one for reversal of irregular credit but for the statutory percentage amount on exempted clearances.

Conclusion: The issue was decided in favour of the assessee. The demand of Rs. 3,78,10,848/- was set aside.

Final Conclusion: The appeal succeeded on the major demand under Rule 6 and on penalties, but failed on the capital goods credit issue, resulting in a partial allowance of the appeal.

Ratio Decidendi: Entitlement to Cenvat credit on capital goods is determined with reference to the date of receipt in the factory, and the statutory 8% liability under Rule 6(3)(b) arises only when the manufacturer opts not to maintain separate accounts as required by Rule 6(2).

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