Reversal of CENVAT credit can satisfy exemption conditions where exempted-clearance credit is neutralised without separate input accounts

Reversal of CENVAT credit attributable to exempted clearances was treated as equivalent to non-availment of credit, so exemption under Notification No. 30/2004-CE could not be denied merely because separate input accounts were not maintained. The settled position under Rule 6(3) of the CENVAT Credit Rules, 2004 supported the view that, once the credit relatable to exempted goods was neutralised, the separate-account requirement was not a condition precedent for the exemption. On that basis, denial of exemption was held unsustainable and the Revenue's challenge failed.

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Issues: Whether the assessee could be denied exemption under Notification No. 30/2004-CE for not maintaining separate accounts of inputs when proportionate CENVAT credit attributable to exempted clearances had been reversed.

Analysis: The issue was treated as settled by binding precedent. Reversal of credit attributable to exempted goods was treated as equivalent to non-availment of credit for the purpose of the exemption scheme. The requirement to maintain separate accounts was held not to be a condition precedent where the assessee had otherwise neutralised the credit relating to exempted clearances. Rule 6(3) of the Cenvat Credit Rules, 2004 and the settled position on reversal of Modvat/CENVAT credit supported this view.

Conclusion: The denial of exemption was not sustainable, and the Revenue's challenge failed.

Final Conclusion: The appeal was rejected and the order allowing the assessee's claim was upheld.

Ratio Decidendi: Reversal of credit attributable to exempted goods amounts to non-availment of such credit, so exemption cannot be denied solely for want of separate input accounts when the credit relating to exempted clearances has been reversed.

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