Subsequent reversal of proportionate Cenvat credit for exempted clearances defeats a Rule 6(3)(b) demand.

Subsequent reversal of proportionate Cenvat credit attributable to inputs and input services used in exempted final products was treated as curing the objection under Rule 6(3)(b) of the Cenvat Credit Rules. Where the assessee maintained a common Cenvat account for exempted and dutiable goods and reversed the relevant credit after clearance, the Tribunal applied settled precedent that such reversal has the effect of treating the credit as never taken. On that basis, the demand under Rule 6(3)(b) was unsustainable and the assessee succeeded.

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Issues: Whether reversal of proportionate Cenvat credit attributable to inputs and input services used in exempted final products, made after clearance of the goods, disentitled the Revenue from demanding payment under Rule 6(3)(b) of the Cenvat Credit Rules.

Analysis: The respondents were manufacturing both exempted and dutiable products and were maintaining a common Cenvat account. The only dispute was that the proportionate credit was reversed after clearance of the exempted goods. The Tribunal found that this issue was no longer res integra and that prior decisions had held that once the attributable credit is reversed, the position is to be treated as if such credit had never been taken, even if the reversal is made subsequently. On that basis, the demand under Rule 6(3)(b) was not sustainable.

Conclusion: The demand under Rule 6(3)(b) of the Cenvat Credit Rules was not sustainable; the appeal was rejected and the assessee succeeded.

Ratio Decidendi: Subsequent reversal of proportionate Cenvat credit attributable to exempted clearances removes the basis for a demand under Rule 6(3)(b), because the legal effect is treated as if no such credit had been availed.

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