Cenvat credit on common inputs remains admissible where dutiable and exempt products are both manufactured; only prescribed reversal applies.

Cenvat credit on molasses was admissible where the same common input was used in manufacturing both dutiable denatured ethyl alcohol and exempt extra neutral alcohol, because the stage at which the products emerged was immaterial and credit could not be denied merely due to exemption of one final product. Where separate accounts for common inputs were not maintained, the correct consequence was reversal of the prescribed 8% of the price of the exempt final products, not denial of the entire credit. The commentary states that total disallowance was unsustainable under the credit scheme.

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Issues: (i) whether Cenvat credit on molasses was admissible when the same input was used in the manufacture of both dutiable denatured ethyl alcohol and exempt extra neutral alcohol; (ii) whether the absence of separate accounts for common inputs justified denial of the entire credit or only reversal of the prescribed percentage.

Issue (i): whether Cenvat credit on molasses was admissible when the same input was used in the manufacture of both dutiable denatured ethyl alcohol and exempt extra neutral alcohol.

Analysis: The decisive questions were whether the products manufactured were final products, whether molasses was a common input, and whether one product was exempt while the other was dutiable. The record showed that molasses was a common input for both products and that denatured ethyl alcohol was produced by further processing of the stream derived from the same input. The stage at which one product emerged was held to be immaterial. Since the input was used for both a dutiable and an exempt product, credit could not be denied in its entirety merely because one final product was exempt.

Conclusion: Cenvat credit on molasses was admissible and the denial of the entire credit was unsustainable.

Issue (ii): whether the absence of separate accounts for common inputs justified denial of the entire credit or only reversal of the prescribed percentage.

Analysis: Where common inputs are used in both dutiable and exempt products, the assessee is required to maintain separate accounts. If separate accounts are not maintained, the prescribed consequence is reversal of 8% of the price of the exempt final products, not disallowance of the whole credit on the common input. The Commissioner had applied the rules too strictly by treating the entire credit as inadmissible, which was contrary to the correct scheme of the credit provisions.

Conclusion: Only the prescribed reversal applied, and denial of the entire credit was not justified.

Final Conclusion: The assessee's appeal was allowed, the Revenue's appeal was dismissed, and the credit demand was not sustained in full.

Ratio Decidendi: When a common input is used in manufacturing both dutiable and exempt final products, Cenvat credit cannot be denied altogether merely because one product is exempt; the statutory remedy is maintenance of separate accounts or, failing that, the prescribed reversal of credit, not total disallowance.

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