CENVAT credit reversal with interest defeats demand on exempted clearances where no credit benefit survives.

Where a manufacturer took CENVAT credit on common inputs used for both dutiable and exempted goods, the absence of separate accounts under Rule 57AD(2) did not justify a demand once the entire credit had later been reversed or repaid with interest. The operative principle was that, after full neutralisation of the credit, no unwarranted benefit continued to exist and the mischief targeted by the rule no longer survived. On that basis, the demand under Rule 57AD(2) was held unsustainable and the Revenue's appeals were rejected.

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Issues: Whether the Revenue could demand 8% of the price of exempted goods under Rule 57AD(2) when the assessee had not maintained separate accounts for inputs used in dutiable and exempted goods, but had subsequently reversed or deposited the entire CENVAT credit with interest.

Analysis: The respondents manufactured both dutiable and exempted goods and had initially availed CENVAT credit on inputs used for both. Although separate accounts were not maintained as contemplated by Rule 57AD(2), the undisputed position was that the entire credit had later been deposited back through TR 6 challan or reversed with interest. Once the credit stood neutralised, it could not be said that any unwarranted credit benefit continued to exist in the hands of the assessee. The earlier Tribunal view relied on the same principle, namely that where credit is reversed by the assessee on its own, the mischief addressed by the rule does not survive.

Conclusion: The demand under Rule 57AD(2) was not sustainable and the Revenue's appeals were liable to be rejected.

Ratio Decidendi: Where CENVAT credit taken on common inputs is fully reversed or repaid with interest before enforcement of the demand, the liability under the rule for exempted clearances does not survive.

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