CENVAT credit on common inputs survives when proportionate reversal is made for exempt output under Rule 6.

Where common duty-paid inputs are used to manufacture both exempted and dutiable final products, maintenance of separate accounts is the governing requirement under Rule 6 of the CENVAT Credit Rules, 2004. In the absence of separate accounts, reversal or payment of the credit attributable to the exempted goods constitutes sufficient compliance. Applying that principle, the Tribunal treated rectified spirit as an exempt product and denatured spirit as a dutiable product, found that proportionate reversal had been made, and held that the CENVAT credit could not be denied. The demand for recovery of credit and the impugned orders were therefore set aside.

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Issues: Whether the appellants were entitled to avail and retain CENVAT credit on duty-paid molasses used for manufacture of both exempt rectified spirit and dutiable denatured spirit, and whether reversal of proportionate credit under Rule 6 of the CENVAT Credit Rules, 2004 amounted to sufficient compliance.

Analysis: The Tribunal held that rectified spirit, though non-excisable, was an exempt product emerging from the manufacturing process, while denatured spirit was a dutiable product. It found that the appellants manufactured both exempted and dutiable goods using common duty-paid inputs and had been reversing credit in accordance with Rule 6. The Tribunal relied on earlier decisions recognising that where a manufacturer uses common inputs for exempted and dutiable final products, maintenance of separate accounts is the governing requirement, and in the absence of separate accounts, reversal or payment of the attributable credit satisfies the rule. The approval of a similar view by the Supreme Court was treated as reinforcing that proportional reversal is sufficient compliance.

Conclusion: The appellants were entitled to CENVAT credit subject to Rule 6 compliance, and the proportionate reversal already made was sufficient. The demand for recovery of credit and the impugned orders could not be sustained.

Final Conclusion: The appeals succeeded and the orders denying credit were set aside.

Ratio Decidendi: Where common duty-paid inputs are used to manufacture both exempted and dutiable final products, reversal or payment of the credit attributable to exempted goods constitutes sufficient compliance with Rule 6 of the CENVAT Credit Rules, 2004.

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