Proportionate Cenvat credit reversal for common inputs bars demand on exempted clearances under Rule 6.

Reversal of proportionate Cenvat credit attributable to common inputs used in exempted goods was treated as sufficient compliance under Rule 6 of the Cenvat Credit Rules, 2002, where the assessee manufactured both dutiable and exempted goods. The retrospective amendment by the Finance Act, 2010 was understood to recognise such proportionate reversal, and the demand for an amount equal to 8%/10% of the value of exempted clearances was unsustainable on that basis. The impugned demand was therefore set aside, with consequential relief to the assessee.

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Issues: Whether reversal of proportionate Cenvat credit attributable to common inputs used in exempted goods was sufficient compliance under Rule 6 of the Cenvat Credit Rules, 2002, or whether the assessee was liable to pay 8%/10% of the value of the exempted goods cleared.

Analysis: The assessee had used common inputs in the manufacture of both dutiable and exempted goods and had reversed the proportionate credit relatable to the inputs used in exempted goods. The dispute turned on whether, in such circumstances, the demand of an amount equal to 8%/10% of the value of the exempted clearances could still be sustained. The retrospective amendment to the Cenvat Credit Rules by the Finance Act, 2010 recognised reversal of credit attributable to inputs used in exempted goods, and the assessee's course of action was held to be in line with that principle even for the earlier period.

Conclusion: Reversal of proportionate Cenvat credit was held to be sufficient, and the demand for 8%/10% of the value of the exempted goods was held unsustainable.

Final Conclusion: The impugned demand was set aside and the assessee obtained consequential relief.

Ratio Decidendi: Where common inputs are used for both dutiable and exempted goods and the credit attributable to exempted goods is reversed, a demand of 8%/10% of the value of exempted clearances cannot be sustained once the law recognises proportionate reversal of credit.

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