Reversal of Cenvat credit on common inputs preserves Small Scale Exemption where exempt goods were manufactured separately.

Reversal of Cenvat credit relatable to common inputs used in exempted unbranded tanks was treated as sufficient compliance with the condition for Small Scale Exemption under Notification No. 8/2003-CE. The assessee had taken credit on duty-paid granules used for both dutiable and exempt goods, but reversed the portion attributable to the exempt tanks, which neutralised the bar on availing credit for exemption purposes. The accepted practice in later periods also supported this treatment. On that basis, the exemption remained available and the proposed demand and penalty could not survive.

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Issues: Whether the assessee was entitled to Small Scale Exemption under Notification No. 8/2003-CE despite using common inputs on which Cenvat credit had been taken, where the credit attributable to inputs used for exempted unbranded tanks was reversed.

Analysis: The sole dispute was whether availment of credit on common inputs disentitled the assessee from the exemption. The record showed that when the duty-paid granules were used for manufacture of unbranded tanks, the assessee identified the credit relatable to those inputs and reversed it. Such reversal was treated as sufficient compliance with the condition against availing Cenvat credit for the exempted goods. The accepted practice in subsequent periods also supported the assessee's stand. The principle that reversal of credit neutralises the bar on availment of credit for exemption purposes was applied.

Conclusion: The assessee satisfied the condition of non-availment of Cenvat credit and was entitled to the exemption; the demand and penalty could not survive.

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