Reversal of common-input credit can defeat Rule 6 demand when exempt clearances are proportionately adjusted.

Reversal of proportionate common-input credit can defeat a demand under Rule 6(3)(b) where the only credit taken was education cess and it was not used for exempt clearances. The tractors below 1800 CC did not attract industrial cess or education cess, and the assessee had not taken central excise duty credit on the common inputs. Because the proportionate credit attributable to the exempt clearances had been reversed, and that reversal was not disputed in the notice, the demand of an amount equal to ten per cent of the exempted goods' value was held unsustainable. The penalty was also set aside.

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Issues: Whether the appellant was liable to pay an amount equal to 10% of the value of tractors cleared without industrial cess and education cess under Rule 6(3)(b) of the Cenvat Credit Rules, 2004, when only education cess credit on common inputs had been taken and proportionate credit attributable to the exempted clearances had been reversed.

Analysis: The tractors below 1800 CC did not attract industrial cess or education cess, and the appellant had not availed central excise duty credit on the common inputs. The only credit taken was education cess, which was utilized for the dutiable category and proportionately reversed for the tractors below 1800 CC. The reversal was not disputed in the show cause notice. In such circumstances, the demand of 10% of the value of exempted goods under Rule 6(3)(b) was held to be unsustainable. The decision was supported by the principle that reversal of credit amounts to non-availment of credit and by later decisions approving even belated reversal as sufficient compliance.

Conclusion: The demand and penalty were unsustainable and were set aside in favour of the assessee.

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