Proportionate reversal of Cenvat credit treated as non-availment, defeating further Rule 6 demand on exempt clearances.
Where an assessee used common inputs in manufacturing tractors but had not taken central excise credit on those inputs, a demand under Rule 6(3)(b) of the Cenvat Credit Rules, 2004 for 10% of the value of exempted clearances was not sustainable merely because separate accounts were not maintained. Reversal of proportionate education cess credit attributable to the exempt tractors was treated as non-availment of that credit and was sufficient compliance under Rule 6. The further demand based on the exempted value, and the associated penalty, were therefore set aside.
Issues: (i) Whether the assessee was liable to pay an amount equal to 10% of the value of tractors of engine capacity below 1800 CC under Rule 6(3)(b) of the Cenvat Credit Rules, 2004 for using common inputs without maintaining separate accounts; (ii) Whether reversal of proportionate education cess credit attributable to the exempted clearances was sufficient compliance so as to bar the demand under Rule 6.
Issue (i): Whether the assessee was liable to pay an amount equal to 10% of the value of tractors of engine capacity below 1800 CC under Rule 6(3)(b) of the Cenvat Credit Rules, 2004 for using common inputs without maintaining separate accounts.
Analysis: The dispute arose from availing Cenvat credit of education cess on common inputs used in the manufacture of tractors, while only tractors above 1800 CC attracted industrial cess and consequential education cess. The demand under Rule 6(3)(b) was based on the premise that, in the absence of separate accounts, the assessee had to pay 10% of the value of exempted tractors. The record showed that no credit of central excise duty was availed on the inputs and that the only credit taken was education cess, which was used against the dutiable clearances. Since the tractors below 1800 CC were not liable to industrial cess or education cess, the demand could not survive merely because separate accounts were not maintained.
Conclusion: The assessee was not liable to pay 10% of the value of the exempted tractors under Rule 6(3)(b).
Issue (ii): Whether reversal of proportionate education cess credit attributable to the exempted clearances was sufficient compliance so as to bar the demand under Rule 6.
Analysis: The assessee reversed the proportionate education cess credit relatable to tractors below 1800 CC, and this reversal was admitted in the show cause notice itself. The decision applied the principle that reversal of credit amounts to non-availment of that credit, and relied on the line of authority holding that belated reversal can still amount to sufficient compliance under Rule 6. On that footing, once the proportionate credit stood reversed, insistence on an additional amount equal to 10% of the exempted value was held to be unsustainable.
Conclusion: Reversal of the proportionate credit was sufficient compliance, and the demand under Rule 6 could not be sustained.
Final Conclusion: The impugned demand and penalty were set aside, and the appeal succeeded on the basis that proportionate reversal of credit negated further liability under Rule 6.
Ratio Decidendi: Where only proportionate credit relatable to exempt clearances is reversed, such reversal is treated as non-availment of credit and a further demand under Rule 6 for a percentage of the exempted value is not sustainable.