Cenvat credit utilisation and proportionate reversal require factual verification before duty demand or limitation findings can stand.

Excess utilisation of Cenvat credit under Rule 6(3)(c) was treated as a restriction on monthly utilisation, not on availment of credit, so any demand could not be confirmed as duty without verifying whether the effect was only deferment of cash payment in the later period. Reversal of proportionate credit attributable to exempted services was recognised as relevant compliance, and the mere absence of separate accounts was held insufficient without checking the correctness of the quantified reversal. The limitation defence, including departmental knowledge and disclosure in returns, also required fresh consideration. The matter was therefore remanded for de novo adjudication with verification of utilisation, reversal, and limitation.

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Issues: (i) Whether excess utilisation of Cenvat credit beyond the prescribed limit under Rule 6(3)(c) could sustain the demand as duty, and whether the consequence was confined to interest for deferment of cash payment. (ii) Whether reversal of proportionate Cenvat credit attributable to exempted services could be treated as compliance with the obligation under Rule 6 so as to negate the demand raised for non-maintenance of separate accounts. (iii) Whether the issue of limitation and invocation of the extended period required reconsideration.

Issue (i): Whether excess utilisation of Cenvat credit beyond the prescribed limit under Rule 6(3)(c) could sustain the demand as duty, and whether the consequence was confined to interest for deferment of cash payment.

Analysis: The restriction under Rule 6(3)(c) was treated as a restriction on utilisation in a particular month, not on mere availment of credit. It was observed that excess utilisation in one period may only defer the cash outflow to a subsequent period, and the actual impact in the succeeding month had to be examined. The matter was not analysed by the adjudicating authority in that factual context.

Conclusion: The issue required factual verification and could not be sustained as a straight duty demand on the existing record.

Issue (ii): Whether reversal of proportionate Cenvat credit attributable to exempted services could be treated as compliance with the obligation under Rule 6 so as to negate the demand raised for non-maintenance of separate accounts.

Analysis: The adjudicating authority proceeded only on the basis that separate accounts were not maintained. The proportionate foregone credit attributable to exempted services was treated as relevant compliance, and the absence of a separate account by itself was held insufficient. The correctness of the quantified reversal had not been verified.

Conclusion: The demand on this ground was set aside for fresh examination of the actual proportionate reversal.

Issue (iii): Whether the issue of limitation and invocation of the extended period required reconsideration.

Analysis: The defence based on knowledge of the department and disclosure in returns was not dealt with in proper perspective. The limitation question therefore needed reconsideration along with the merits.

Conclusion: The limitation issue was remanded for fresh decision.

Final Conclusion: The impugned order was set aside and the matter was sent back for de novo adjudication after verification of utilisation, proportionate reversal, and limitation, with opportunity of hearing to the appellant.

Ratio Decidendi: Where the assessee's excess Cenvat utilisation may only defer cash payment and where proportionate reversal attributable to exempted services is claimed, the demand cannot be confirmed without factual verification of the actual utilisation, reversal, and limitation.

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