Cenvat credit on common inputs for mixed dutiable and exempt production cannot be denied when exempt-related credit is reversed.

Cenvat credit on molasses used in a composite process for rectified spirit, carbon dioxide and denatured spirit was admissible because the input was not used only for an exempt product and the credit relatable to rectified spirit had already been reversed; Rule 6 did not justify denial. Credit on furnace oil used to generate steam for both electricity generation and distillery processing was also admissible because it was a common input and not one used exclusively for rectified spirit. Once credit was allowed on both inputs, the consequential penalty and interest were unsustainable and were set aside.

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Issues: (i) Whether Cenvat credit on molasses used in the manufacture of rectified spirit was inadmissible because rectified spirit was treated as non-excisable after 01.03.2005; (ii) Whether Cenvat credit on furnace oil used in generating steam for the distillery operations was inadmissible; (iii) Whether penalty and interest were sustainable in view of the credit entitlement.

Issue (i): Whether Cenvat credit on molasses used in the manufacture of rectified spirit was inadmissible because rectified spirit was treated as non-excisable after 01.03.2005.

Analysis: Molasses was used as an input in a composite manufacturing process in which carbon dioxide and denatured spirit were also produced and cleared on payment of duty. The credit attributable to rectified spirit had already been reversed. In such a situation, the input could not be treated as used only for an exempt product, and Rule 6 did not justify denial of credit.

Conclusion: The credit on molasses was held to be admissible and the demand for reversal was set aside in favour of the assessee.

Issue (ii): Whether Cenvat credit on furnace oil used in generating steam for the distillery operations was inadmissible.

Analysis: Furnace oil was used to generate steam, which was partly used for electricity generation and partly for processing molasses in the distillery. It was therefore a common input and not an input used exclusively for rectified spirit. Credit on such fuel could not be denied merely because one of the end uses was linked with an exempted product.

Conclusion: The credit on furnace oil was held to be admissible in favour of the assessee.

Issue (iii): Whether penalty and interest were sustainable in view of the credit entitlement.

Analysis: Once the credit on molasses and furnace oil was held admissible, the foundation for penalty and interest did not survive.

Conclusion: Penalty and interest were not sustainable and were set aside in favour of the assessee.

Final Conclusion: The appeal succeeded because the credit taken on both molasses and furnace oil was found to be legally available, and the consequential demand, penalty, and interest were unsustainable.

Ratio Decidendi: Where input goods or fuel are common inputs in the manufacture of both exempted and dutiable products, and the credit relatable to the exempted clearances is reversed or otherwise accounted for, Cenvat credit cannot be denied merely on the assumption of exclusive use for an exempt product.

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