Rule 6 Cenvat credit dispute: separate accounts and no credit on exempted inputs defeated percentage-based demand and penalties.

Rule 6 did not support a percentage-based demand where the manufacturer cleared both dutiable and exempted goods but took no Cenvat credit on inputs used in exempted goods and maintained separate accounts. A common storage arrangement for some inputs did not, by itself, negate the separate-account finding. On those facts, the proposed payment of 8% or 10% of the value of exempted goods, together with interest and penalty, had no foundation and was unsustainable.

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Issues: Whether demand of 8% of the value of exempted goods and the consequential interest and penalty were sustainable when no Cenvat credit was taken on inputs used in exempted products and separate accounts were maintained.

Analysis: The appeal turned on the applicability of Rule 6 where the manufacturer cleared both dutiable and exempted goods. The record showed that credit was taken only on inputs used in dutiable goods and no credit was taken on inputs going into exempted goods. The existence of a common storage arrangement for some inputs did not, by itself, displace the finding that the accounts were maintained separately. In such a situation, there was no basis for requiring payment of 8% or 10% of the value of exempted goods. The demand, interest, and penalty therefore lacked foundation.

Conclusion: The demand under Rule 6, along with the interest and penalty, was unsustainable and the assessee succeeded.

Ratio Decidendi: Where no Cenvat credit is taken on inputs used in exempted goods and separate accounts are maintained, Rule 6 does not justify a demand of percentage-based payment merely because some inputs are stored commonly.

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