Reversal of CENVAT credit on exempted goods can defeat percentage-based demand and extended limitation when duly disclosed.

Reversal of CENVAT credit on common inputs used in exempted final products, when made before utilisation and disclosed in ER-1 returns, was treated as equivalent to non-availment of credit. On that basis, the percentage-based demand under Rule 6(3)(b) of the CENVAT Credit Rules, 2002 did not survive and was set aside. The same disclosure also negatived suppression, so the extended period of limitation could not be invoked. As the duty demand failed, the associated penalty and interest were also held unsustainable, and the assessee obtained consequential relief.

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Issues: (i) Whether reversal of CENVAT credit on common inputs used in exempted final products precluded the demand of 8% of the sale value under Rule 6(3)(b) of the CENVAT Credit Rules, 2002; (ii) Whether the extended period of limitation and consequential penalty and interest were sustainable.

Issue (i): Whether reversal of CENVAT credit on common inputs used in exempted final products precluded the demand of 8% of the sale value under Rule 6(3)(b) of the CENVAT Credit Rules, 2002.

Analysis: The credit relating to inputs used for exempted products had been reversed before utilisation and the reversal was disclosed in the monthly returns. On that basis, the Tribunal treated the reversal as equivalent to non-availment of credit and followed the settled principle that once such credit is reversed, the basis for demanding 8% of the value of exempted goods does not survive.

Conclusion: The demand under Rule 6(3)(b) was held unsustainable and was set aside in favour of the assessee.

Issue (ii): Whether the extended period of limitation and consequential penalty and interest were sustainable.

Analysis: Since the reversal of credit had been intimated to the department in the ER-1 returns, the Tribunal found no suppression of facts or basis for invoking the extended period. In the absence of a sustainable duty demand, the penalty and interest could not survive.

Conclusion: The extended period, penalty and interest were held unsustainable in favour of the assessee.

Final Conclusion: The appeals succeeded, the impugned orders were set aside, and the assessee obtained consequential relief.

Ratio Decidendi: Reversal of credit on common inputs used for exempted goods, when duly disclosed to the department, is treated as equivalent to non-availment of credit and negatives both the percentage-based demand and invocation of the extended limitation period.

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