Proportionate Cenvat credit reversal defeats Rule 6 demand where exempt clearances already reflect the relatable input credit reversal.

Proportionate reversal of Cenvat credit attributable to exempt clearances was treated as sufficient compliance on the facts, because the assessee had taken credit only on duty-paid indigenous inputs and reversed the relatable credit when clearing goods without duty under the exemption notification. On that basis, a further demand under Rule 6 for non-maintenance of separate records was not warranted, and the associated penalty could not survive. The text states that the demand and penalty were set aside, with relief granted to the assessee.

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Issues: Whether the demand under Rule 6 of the Cenvat Credit Rules was sustainable when the assessee reversed proportionate credit on common inputs used in exempt clearances made under Notification No. 10/97-C.E.; and whether the consequential penalty could survive.

Analysis: The clearances to the defence organisation were made without payment of duty under the exemption notification. The assessee had taken credit only on duty-paid indigenous inputs and reversed the proportionate credit at the time of clearance of the exempted goods. On these facts, the liability alleged by the Revenue did not survive, since the credit relatable to exempt goods had already been reversed and the demand was therefore unsupported.

Conclusion: The demand and penalty were not sustainable and were set aside; the assessee's appeal was allowed and the Revenue's appeal was dismissed.

Final Conclusion: Proportionate reversal of credit for exempted clearances was treated as sufficient to defeat the demand based on common inputs, with the result that the assessee obtained full relief.

Ratio Decidendi: Where proportionate Cenvat credit attributable to exempt clearances is reversed, a further demand under Rule 6 for non-maintenance of separate records is not warranted on the same facts.

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