Reversal of common input credit before clearance bars further percentage-based demand for exempted goods under Cenvat credit rules.

Where credit taken on common inputs used in exempted clearances is fully reversed before the exempt goods are cleared, the basis for treating the credit as subsisting does not survive, and a further demand of 8% of the value of exempted goods under Rule 6 of the Cenvat Credit Rules, 2001 is not attracted. The Andhra Pradesh High Court also noted that an earlier decision had applied the settled principle that reversal of credit before clearance neutralises the credit availed on inputs used for exempt goods. The departmental appeal therefore failed, and the Tribunal's view was left undisturbed.

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Issues: (i) whether the assessee, having reversed the entire credit on common inputs used for exempted clearances, was still liable to pay 8% of the price of the exempted goods under Rule 6 of the Cenvat Credit Rules, 2001; (ii) whether the departmental appeal could succeed in view of the earlier decision applying the principle that reversal of credit before clearance neutralises the credit availed on inputs used in exempted goods.

Issue (i): whether the assessee, having reversed the entire credit on common inputs used for exempted clearances, was still liable to pay 8% of the price of the exempted goods under Rule 6 of the Cenvat Credit Rules, 2001

Analysis: Rule 6 of the Cenvat Credit Rules, 2001 contemplates denial of credit on inputs used in exempted goods unless the manufacturer maintains separate accounts or follows the prescribed alternative obligation. On the facts recorded, the credit taken on the disputed inputs had already been reversed before clearance of the exempted goods. Once the corresponding credit stands reversed and is no longer retained in the assessee's account, the legal basis for treating the assessee as having unlawfully availed credit on exempted inputs does not survive. In such circumstances, the alternative demand of 8% of the value of exempted goods is not attracted.

Conclusion: the issue was answered in favour of the assessee and against the Revenue.

Issue (ii): whether the departmental appeal could succeed in view of the earlier decision applying the principle that reversal of credit before clearance neutralises the credit availed on inputs used in exempted goods

Analysis: The earlier Tribunal decision had applied the governing principle from the Supreme Court that where the credit on inputs used for exempted products is reversed, the credit cannot be treated as subsisting for the purpose of demanding further amount under the exemption-related rule. No contrary decision was brought to show that the earlier view was inapplicable. The appeal therefore did not disclose any reason to disturb the Tribunal's reliance on the settled position.

Conclusion: the issue was answered in favour of the assessee and against the Revenue.

Final Conclusion: the departmental appeal failed, and the dismissal of the appeal below was left undisturbed, with the questions of law answered for the assessee.

Ratio Decidendi: where credit taken on common inputs used in exempted goods is duly reversed before clearance, the assessee cannot be fastened with a further percentage-based demand merely because separate accounts were not maintained.

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