Proportionate CENVAT credit method upheld where records showed no credit on exempted goods and retrospective amendment applied.

Where an assessee availed CENVAT credit only on inputs used for dutiable final products on a proportionate basis, the demand for reversal could not be sustained merely because separate inventories or issue slips were not maintained. The record showed no credit was taken on inputs used in exempted goods, and the departmental report accepted the assessee's position for the relevant period. A retrospective amendment under the Finance Act, 2010 supported the proportionate credit methodology, so the confirmed demand and penalty did not survive.

---

---

Issues: Whether the assessee was liable to reverse/pay demand under Rule 6(2) of the CENVAT Credit Rules, 2002 for not maintaining separate accounts for inputs used in dutiable and exempted final products, and whether the retrospective amendment under Section 72 of the Finance Act, 2010 supported the assessee's proportionate credit methodology.

Analysis: The demand was founded on alleged non-compliance with the requirement of separate accounts and related records for inputs used in dutiable and exempted products. The record, including the report called for from the field formation, showed that the assessee had not taken credit on inputs used in exempted goods, but had availed credit proportionately on inputs used in the manufacture of dutiable final products. The dispute, therefore, was only about the method adopted for arriving at the admissible credit. In light of the retrospective amendment permitting proportionate reversal with interest and the undisputed departmental acceptance of the assessee's claim for the relevant period, the insistence on separate physical inventories and issue slips did not sustain the demand.

Conclusion: The assessee was not liable to the confirmed demand and penalty, and the appeal of the assessee succeeded while the Revenue's appeal failed.

Ratio Decidendi: Where the assessee avails CENVAT credit only on inputs used in dutiable goods on a proportionate basis and this position is supported by the record, demand cannot be sustained merely for want of separate inventories or issue slips, especially after a retrospective amendment validating proportionate credit reversal.

---