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Issues: Whether CENVAT credit taken on molasses and furnace oil used in the manufacture of rectified spirit, denatured spirit and carbon dioxide was admissible, and whether any reversal of credit, penalty or interest was warranted.
Analysis: Molasses was used as a common input in the manufacture of both exempted rectified spirit and dutiable products such as denatured spirit and carbon dioxide. The credit was not liable to be denied merely because part of the output was exempt, since the credit attributable to the exempted use had been reversed. Furnace oil was used to generate steam, which was applied both for electricity generation and for processing in the distillery, so it too operated as a common input and not exclusively for the exempted product. In such circumstances, Rule 6 of the CENVAT Credit Rules did not justify denial of credit, and once credit was otherwise in order, penalty and interest under Section 11AB had no basis.
Conclusion: The CENVAT credit on molasses and furnace oil was admissible, and the demand, penalty and interest were unsustainable.
Ratio Decidendi: Where inputs are used commonly for both exempted and dutiable products and the attributable credit is reversed, Rule 6 does not permit denial of CENVAT credit or consequential penal and interest liabilities.
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