Reversal of Cenvat credit before removal of exempted goods defeats Rule 6 liability for separate inventory failure.

Where Cenvat credit on inputs used for exempted goods is reversed with interest before those goods are removed, the assessee is treated as if credit had not been availed. Applying the Chandrapur Magnet Wires principle, the obligation to pay the amount prescribed under Rule 6 for failure to maintain separate inventories does not survive after such pre-clearance reversal. The contrary Revenue authority was distinguishable because the credit had not been reversed there. On that footing, the demand under Rule 6 could not be sustained and the assessee was not liable to pay the percentage amount on the exempted goods.

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Issues: Whether reversal of Cenvat credit on inputs before removal of exempted goods nullifies the obligation to pay 8% of the sale price under Rule 6 of the Cenvat Credit Rules, 2002 for failure to maintain separate inventories.

Analysis: The credit had been reversed with interest before removal of the exempted machinery. On that reversal, the position was treated as if credit had not been availed at all. The principle laid down in Chandrapur Magnet Wires continued to apply under the Cenvat regime, and the contrary decision relied on by the Revenue was distinguishable because there the credit had not been reversed. The demand under Rule 6, therefore, could not survive once the credit was reversed prior to clearance.

Conclusion: The assessee was not liable to pay 8% of the sale price of the exempted goods, and the appeal succeeded.

Ratio Decidendi: Where Cenvat credit on inputs used in exempted goods is reversed before removal of the goods, the assessee is to be treated as not having availed credit, and liability to pay the amount prescribed for non-maintenance of separate inventory does not arise.

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