Reversal of input credit defeats further demand on exempt clearances where separate accounts were not maintained.

Reversal of credit attributable to inputs used in exempted clearances neutralised the objection to availment of credit, so a further demand of 8% of the exempted value was not justified. On the facts, the assessee manufactured a single product that became exempt under a notification, and the credit relating to the inputs in those clearances had already been reversed. Rule 57CC was therefore not attracted merely because separate accounts were not maintained, and the demand was held unsustainable in favour of the assessee.

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Issues: Whether demand of 8% of the value of exempted clearances was sustainable when the assessee had reversed the credit attributable to inputs used in the goods cleared without duty and Rule 57CC was invoked for alleged failure to maintain separate accounts.

Analysis: The assessee manufactured only one product which had originally been dutiable and later became exempt under the notification. The credit attributable to the inputs used in the cleared goods had already been reversed. In such a situation, the reasoning based on the Supreme Court principle that reversal of credit neutralises the objection to availment of credit applied, and the insistence on payment of 8% of the sale value was not justified. Rule 57CC was not attracted to sustain the demand on these facts.

Conclusion: The demand was not sustainable and the appeal succeeded in favour of the assessee.

Ratio Decidendi: Where the credit attributable to inputs used in exempted clearances is reversed, a further demand calculated as a percentage of the exempted value cannot be sustained merely on the basis of alleged non-maintenance of separate accounts.

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