Full reversal of Cenvat credit with interest can neutralise the Rule 6 demand on exempted goods.

Rule 6 of the Cenvat Credit Rules was examined in the context of exempted by-products arising from common inputs, with the Tribunal distinguishing the broader proposition that Rule 6 may apply from the separate question of credit reversal. It applied the principle that when the entire credit attributable to exempted goods is reversed with interest, the assessee is treated as if no credit had been taken on those inputs, so the further demand of 8%/10% of the exempted goods' sale value does not survive. The note also records that the Board circular supported recovery only of wrongly taken credit in such circumstances.

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Issues: (i) Whether Rule 6 of the Cenvat Credit Rules applied to by-products arising in the course of manufacture from common inputs when one resultant product was exempted; (ii) Whether reversal of the entire credit attributable to the exempted goods with interest displaced the demand for 8%/10% of the sale value of such exempted goods.

Issue (i): Whether Rule 6 of the Cenvat Credit Rules applied to by-products arising in the course of manufacture from common inputs when one resultant product was exempted.

Analysis: The larger bench view relied on by the Revenue stated that where two excisable final products emerge from common inputs and one is exempted, Rule 6 applies irrespective of whether the exempted product is intended or an unintended by-product. However, the decision also noted that the precise question of reversal of attributable credit had not been examined there. The Tribunal therefore distinguished the broader applicability of Rule 6 from the separate question whether complete reversal of credit would amount to no credit having been taken.

Conclusion: Rule 6 was not applied to sustain the impugned demand against the assessee on the facts of this case.

Issue (ii): Whether reversal of the entire credit attributable to the exempted goods with interest displaced the demand for 8%/10% of the sale value of such exempted goods.

Analysis: The Tribunal applied the principle that once credit attributable to exempted goods is fully reversed with interest, the assessee is to be treated as not having taken credit on those inputs at all. On that footing, the consequence contemplated by Rule 6 for non-maintenance of separate accounts or non-payment of the prescribed amount did not survive. The Board circular was also noted as supporting recovery only of the credit wrongly taken in such circumstances.

Conclusion: The full reversal of credit with interest neutralised the demand for 8%/10% of the sale value of the exempted goods.

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

Ratio Decidendi: Where the assessee reverses the entire credit attributable to exempted goods with interest, it is to be treated as if no credit had been taken on those inputs, and the payment obligation under Rule 6 does not survive.

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