CENVAT credit reversal for exempted goods avoids the 8% demand where common input credit is not retained.

An assessee manufacturing both dutiable and exempted final products was not liable to pay 8% of the price of the exempted products merely because separate accounts of common inputs were not maintained, where the CENVAT credit attributable to inputs used in the exempted goods had already been reversed. The rule under Rule 57AD of the Central Excise Rules, 1944 and Rule 6 of the CENVAT Credit Rules, 2001/2002 is intended to deny credit benefit for inputs used in exempted goods. Once the relatable credit was reversed, the assessee no longer retained that benefit, so the absence of separate accounts did not justify the demand.

---

---

Issues: Whether an assessee manufacturing both dutiable and exempted final products is liable to pay 8% of the price of the exempted products merely because separate accounts of common inputs were not maintained, when the CENVAT credit attributable to inputs used in exempted goods had been reversed.

Analysis: The assessee had taken CENVAT credit on common inputs used for both categories of products, but the credit relatable to inputs used in exempted goods was reversed when those inputs were identified. The legal requirement under Rule 57AD of the Central Excise Rules, 1944 and Rule 6 of the CENVAT Credit Rules, 2001/2002 is aimed at denying the benefit of credit where inputs are used in exempted goods without proper segregation. Once the credit attributable to exempted goods stood reversed, the assessee did not retain the benefit of such credit, and the mere absence of separate accounts did not justify demand of 8% of the price of the exempted final products.

Conclusion: The assessee was not liable to pay 8% of the price of the exempted final products.

---