Reversal of proportionate common CENVAT credit before notice defeats the percentage-based demand under Rule 6(3)(i).

Reversal of proportionate CENVAT credit attributable to common input services before issuance of the show-cause notice was treated as equivalent to non-availment of that credit. On that basis, the percentage-based liability under Rule 6(3)(i) of the CENVAT Credit Rules, 2004 was held not to arise merely because separate accounts had not been maintained. The demand was therefore unsustainable, and the associated interest and penalty also fell with the principal demand.

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Issues: Whether, on reversal of proportionate CENVAT credit on common input services before issuance of the show-cause notice, the demand of 6% of the value of exempted clearances under Rule 6(3)(i) of the CENVAT Credit Rules, 2004 was sustainable.

Analysis: The appellant had reversed the proportionate credit relatable to the common input services before issuance of the show-cause notice, on being pointed out by audit. The reversal was treated as having the effect that the credit was not availed to that extent. The decision relied upon holds that where credit attributable to exempted clearances is reversed, the liability to pay the prescribed percentage of the value of exempted goods does not arise merely because separate accounts were not maintained. The same principle applied to the facts of the present case.

Conclusion: The demand under Rule 6(3)(i) was not sustainable and the appeal was allowed in favour of the assessee.

Final Conclusion: Reversal of proportionate common credit before the show-cause notice defeated the basis for the impugned demand, interest and penalty.

Ratio Decidendi: Where proportionate CENVAT credit attributable to exempted clearances is reversed before issuance of the show-cause notice, the percentage-based liability under Rule 6(3)(i) of the CENVAT Credit Rules, 2004 is not attracted.

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