Cenvat credit and exempted clearances: separate accounts, not separate storage, defeated the Rule 6 demand and related penalties.

Where an assessee does not take Cenvat credit on inputs used in exempted goods and maintains separate accounts for credit-bearing and non-credit-bearing inputs, a Rule 6 demand of 8% or 10% of exempted clearances is not attracted. Separate physical storage is not required if the governing condition of separate accounting is satisfied. On that basis, the connected interest and penalty were also unsustainable and the demand was set aside.

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Issues: Whether demand of 8% of the value of exempted clearances and the connected interest and penalty were sustainable when the assessee did not avail Cenvat credit on inputs used in exempted products and maintained separate accounts.

Analysis: The dispute concerned news print-in reels, which had already been classified under Heading 48.01 and hence attracted nil duty. The assessee's accounting practice showed that Cenvat credit was taken only on inputs used in dutiable goods, while no credit was taken on inputs used in exempted goods. Once separate accounts were maintained for the credit-bearing inputs and no credit was availed on exempted production, there was no basis for invoking the requirement to pay 8% or 10% of the value of exempted clearances. The objection that some inputs were stored in the same tank did not defeat the claim, because the governing requirement was separate accounting and not separate physical storage.

Conclusion: The demand, interest, and penalty were not sustainable and were set aside in favour of the assessee.

Final Conclusion: The appeal succeeded because the assessee had not taken credit on inputs used for exempted goods and had maintained separate accounts, making the Rule 6 demand unsustainable.

Ratio Decidendi: Where no Cenvat credit is taken on inputs used in exempted goods and separate accounts are maintained, a demand under Rule 6 for a percentage of exempted clearances is not attracted, and separate physical storage of inputs is not required.

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