Proportionate CENVAT credit reversal defeats demand of 10% on exempted clearances where substantive compliance is shown.

Proportionate reversal of CENVAT credit attributable to input services used in exempted clearances was treated as sufficient, and the later amendment permitting such reversal was applied retrospectively for the pre-01.04.2008 period. The requirement to intimate exercise of the option was treated as procedural, so failure to file the intimation did not defeat the substantive entitlement. As the assessee had already reversed credit on a recognised formula and supported the computation with a Chartered Accountant's certificate, the demand of 10% of the value of exempted clearances was held unsustainable.

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Issues: Whether the demand of 10% of the value of exempted clearances under Rule 6(3)(b) could be sustained when the assessee had reversed proportionate CENVAT credit attributable to input services and the amendment permitting such reversal was retrospective.

Analysis: The period in dispute was prior to 01.04.2008. The applicable scheme, as later amended by Finance Act, 2010, permitted reversal of proportionate credit attributable to inputs or input services used in manufacture of exempted final products. The assessee had already reversed the credit on the formula basis recognised in precedent and had supported the computation with a Chartered Accountant's certificate. The requirement to intimate exercise of the option was treated as procedural, and failure to file such intimation did not justify denial of the substantive entitlement to reverse proportionate credit. Once the proportionate credit had been foregone, the demand of 10% of the value of exempted goods could not be insisted upon.

Conclusion: The demand was unsustainable and the assessee was entitled to the benefit of proportionate reversal of credit instead of payment of 10% of the exempted value.

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