Cenvat credit reversal for exempt goods can satisfy Rule 6 compliance even without separate accounts

Where common inputs are used for both dutiable and exempted goods, Rule 6 of the Cenvat Credit Rules permits compliance through reversal or payment of the credit attributable to exempted goods under Rule 6(3)(a), even if separate accounts are not maintained. The text states that the assessee had reversed the credit relatable to the exempt goods before clearance, which satisfied the statutory requirement, and the later retrospective amendment supported payment either before or after clearance. The contrary Revenue reliance on a case concerning Rule 6(3)(b) was said to be inapplicable. On that basis, denial of exemption, confirmation of duty, and penalty were stated to be unjustified.

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Issues: Whether the assessee was entitled to the benefit of exemption notifications despite not maintaining separate accounts for common inputs, where the Cenvat credit attributable to inputs used in exempted goods was reversed before clearance, and whether denial of exemption and consequential penalty was justified.

Analysis: The applicable scheme under Rule 6 of the Cenvat Credit Rules, 2002 and the pari materia Rule 6 of the Cenvat Credit Rules, 2004 required separate accounts where a manufacturer used common inputs for dutiable and exempted goods, but also permitted an alternative compliance mechanism under Rule 6(3). For exempted goods covered by Rule 6(3)(a), the manufacturer was required to pay an amount equivalent to the Cenvat credit attributable to inputs used in such goods at the time of clearance, and Explanation I permitted payment by debiting the credit or otherwise. The assessee's exempt products fell within Rule 6(3)(a), and the credit relatable to exempted goods had been reversed. The later retrospective amendment in Rule 6 further supported the position that payment could be made before or after clearance. The contrary view taken by the Revenue, including reliance on the Bombay High Court decision dealing with Rule 6(3)(b), was held inapplicable.

Conclusion: The assessee was entitled to the exemption benefit, and denial of the benefit, confirmation of duty, and imposition of penalty were not justified.

Ratio Decidendi: Where common inputs are used for dutiable and exempted goods, reversal or payment of the Cenvat credit attributable to exempted goods in accordance with Rule 6(3)(a) satisfies the statutory requirement and the exemption cannot be denied merely because separate accounts were not maintained.

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