Rule 6 credit reversal for exempted goods: separate accounts could be adopted after reversing attributable input credit.

Tractors became exempt from 9 July 2004, and the dispute concerned whether the assessee, after moving from Rule 6(3)(b) to separate accounts under Rule 6(2), still had to pay 8% of the value of exempted tractors for the intervening period. The record showed that the assessee later stopped taking credit on inputs used for exempted goods and reversed the credit relatable to inputs in stock, work in progress and finished goods. As there was no statutory bar to shifting to Rule 6(2) once the relevant credit was reversed, and the only objection was timing, the demand under Rule 6(3)(b) was held unsustainable.

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Issues: Whether the appellant, having switched from payment under Rule 6(3)(b) to maintenance of separate accounts under Rule 6(2), was liable to pay 8% of the value of exempted tractors for the intervening period or whether reversal of actual credit on inputs in stock, work in progress and finished goods was sufficient.

Analysis: The tractors became exempt from 9.7.2004 and the appellant initially followed Rule 6(3)(b) because immediate segregation of inputs was not practicable. The appellant later put in place a separate-account system and, with effect from 1.9.2004, stopped availing credit on inputs used in exempted goods and reversed the credit attributable to inputs lying in stores, work in progress and finished goods. The record did not show any statutory prohibition requiring reversal of all such credit before shifting to Rule 6(2). The only objection was the timing of reversal, and the demand under Rule 6(3)(b) was not sustainable on that basis.

Conclusion: The demand of 8% of the value of exempted tractors was not payable and the appellant was entitled to the benefit of Rule 6(2) after reversal of the relevant credit.

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