Proportionate Cenvat credit reversal with interest can satisfy Rule 6(3), defeating percentage-based demand and penalties.

Proportionate reversal of Cenvat credit attributable to exempted and non-excisable goods, together with interest, is treated as sufficient compliance with Rule 6(3) of the Cenvat Credit Rules, 2004. On that approach, the assessees are treated as having not availed the credit ab initio, so the further demand of 5% or 10% of the value of exempted goods is not sustainable. The commentary also states that where the dispute is confined to interpretation of the Cenvat scheme and the records do not show suppression or intent to evade duty, invocation of the extended period and the related penalties cannot survive.

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Issues: (i) Whether reversal of proportionate Cenvat credit attributable to exempted and non-excisable goods along with interest was sufficient compliance with Rule 6(3) of the Cenvat Credit Rules, 2004, so as to avoid the demand of 5%/10% of the value of exempted goods. (ii) Whether the demand for the extended period and the penalties were sustainable.

Issue (i): Whether reversal of proportionate Cenvat credit attributable to exempted and non-excisable goods along with interest was sufficient compliance with Rule 6(3) of the Cenvat Credit Rules, 2004, so as to avoid the demand of 5%/10% of the value of exempted goods.

Analysis: The appellant had reversed the proportionate credit relatable to steam, fly-ash and electricity and had also paid interest from the date of availment till reversal. In such a situation, the reversal is treated as if the credit was not taken from the beginning. Rule 6(3) permits either payment of the specified percentage of exempted value or reversal of the credit attributable to exempted goods, and the latter course was accepted as sufficient. Procedural lapse, if any, in the timing or manner of reversal did not justify fastening the larger percentage-based demand.

Conclusion: The demand under Rule 6(3)(i) for 5%/10% of the value of exempted goods was not sustainable and the proportionate reversal with interest was sufficient compliance.

Issue (ii): Whether the demand for the extended period and the penalties were sustainable.

Analysis: The relevant facts regarding manufacture, clearance and sale of the goods were already reflected in the records and returns. The dispute turned on interpretation of the Cenvat scheme and reversal mechanism, and the record did not justify an allegation of suppression or mala fide intent to evade duty. In the absence of such suppression, the extended period could not be invoked, and the penalties based on the same foundation also could not survive.

Conclusion: The demand for the extended period and the penalties were not sustainable.

Final Conclusion: The appeal succeeded, the proportionate credit reversal was upheld as compliance with the Cenvat credit scheme, and the percentage-based demand together with penalties was set aside.

Ratio Decidendi: Where Cenvat credit attributable to exempted goods is reversed along with interest, the assessee is to be treated as having not availed that credit ab initio, and a further demand under the percentage-based option of Rule 6(3) cannot be sustained.

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