Proportionate Cenvat credit reversal defeats Rule 6 levy on exempted trading activity when separate accounts are not maintained.

Reversal of proportionate Cenvat credit attributable to trading activity, treated as an exempted service, was held to have the effect of treating that credit as never availed for that portion. On that basis, the liability to pay 6% of the value under Rule 6(3)(i) did not survive merely because separate accounts were not maintained, and the demand was unsustainable. The impugned order was set aside and the appeal was allowed with consequential relief.

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Issues: Whether reversal of the proportionate Cenvat credit relatable to trading activity, treated as exempted service, extinguishes the liability to pay 6% of the value under Rule 6(3)(i) of the Cenvat Credit Rules.

Analysis: The assessee had reversed the proportionate credit attributable to the trading activity. The settled position applied by the Tribunal was that once such proportionate credit is reversed, the effect is as if credit was never availed for that portion. In that situation, the demand to pay a prescribed percentage of the value of the exempted activity does not survive merely because separate accounts were not maintained.

Conclusion: The liability to pay 6% of the value did not arise after reversal of the proportionate credit, and the demand was not sustainable.

Final Conclusion: The impugned order was set aside and the appeal was allowed with consequential relief.

Ratio Decidendi: Where proportionate Cenvat credit relatable to exempted activity is reversed, the law treats that credit as not availed, and the monetary levy linked to non-maintenance of separate accounts is not attracted.

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