Separate accounts for inputs used in dutiable and exempted goods defeat the 8% demand on exempted castings.

Where a manufacturer avails Cenvat/Modvat credit and produces both dutiable and exempted final products, Rule 57AD(2) is satisfied if separate accounts are maintained for receipt, consumption and inventory of inputs on an actuals basis and credit is confined to inputs used for dutiable goods. On those facts, the 8% amount linked to the sale price of exempted goods is not attracted, and the penalty cannot stand. The record showed compliance with the separate-account requirement, so the demand on exempted castings and the penalty were held unsustainable and set aside in favour of the assessee.

---

---

Issues: Whether the appellant, having maintained separate accounts for receipt, consumption and inventory of inputs used in the manufacture of dutiable and exempted castings, was liable to pay 8% of the sale price of the exempted final product and suffer penalty under the Central Excise Rules, 1944.

Analysis: The requirement under sub-rule (2) of Rule 57AD is that where a manufacturer avails Cenvat/Modvat credit and manufactures both dutiable and exempted final products, separate accounts must be maintained for receipt, consumption and inventory of inputs meant for each category. The record showed that the appellant maintained separate accounts on the basis of actuals, took credit only on inputs used for dutiable products, and worked out the issue of inputs with reference to the exempted final product. On these facts, the statutory requirement stood satisfied and the demand of 8% of the sale price of exempted goods was not attracted.

Conclusion: The demand of 8% of the sale price of exempted castings and the penalty were unsustainable and were set aside in favour of the assessee.

Ratio Decidendi: Compliance with the requirement to maintain separate accounts for inputs used in dutiable and exempted final products is satisfied where such accounts are maintained on actuals and credit is confined to inputs used for dutiable products; in such a case, the 8% demand on exempted goods is not leviable.

---