Separate accounts under Cenvat Credit Rules defeat 5% demand on exempted services, with interest and penalty also set aside.

Maintenance of separate accounts for inputs and input services under Rule 6(2) of the Cenvat Credit Rules, 2004 disentitles the department from demanding 5% of the value of exempted services. On the facts recorded, the appellant was found to have maintained such separate accounts, consistent with its earlier case on identical facts. Once that factual compliance was accepted, the foundation for the demand, together with interest and penalty, ceased to exist. The impugned order was therefore set aside and the demand was held unsustainable, with consequential relief granted to the appellant.

---

---

Issues: Whether the demand of 5% of the value of exempted services, along with interest and penalty, was sustainable where the appellant maintained separate accounts for input and input services.

Analysis: The dispute turned on the requirement under Rule 6(2) of the Cenvat Credit Rules, 2004. In view of the appellant's own earlier case on identical facts, the appellant was found to be maintaining separate accounts as required by the rule. Once separate accounts were accepted, the basis for demanding 5% of the value of exempted services did not survive.

Conclusion: The demand of 5% of the value of exempted services was held to be unsustainable, and the impugned order was set aside in favour of the appellant.

Final Conclusion: The appeal succeeded and the demand, interest, and penalty were annulled, with consequential relief granted as applicable.

Ratio Decidendi: Where separate accounts for inputs and input services are maintained as required under Rule 6(2) of the Cenvat Credit Rules, 2004, a demand based on 5% of the value of exempted services is not sustainable.

---