Common input credit for exempted goods requires reversal or payment under Rule 6(3); extended limitation upheld, penalty deleted.
Where common inputs and input services are used for both dutiable and exempted goods, Rule 6(3) of the Central Excise Rules, 2004 requires the assessee either to reverse the proportionate Cenvat credit attributable to exempted clearances or to pay the prescribed amount on such goods. Continued availment of credit without adopting either course justified the demand, and the extended period of limitation was upheld because the non-compliance persisted despite departmental knowledge from an earlier audit and an undertaking to pay that was not honoured. Penalty was not sustained on the facts, and was set aside.
Issues: (i) whether the assessee was liable to reverse proportionate Cenvat credit attributable to exempted final products or to pay 10% of the value of exempted goods for using common inputs and input services in the manufacture of both dutiable and exempted goods; (ii) whether the demand was barred by limitation; and (iii) whether penalty was sustainable.
Issue (i): whether the assessee was liable to reverse proportionate Cenvat credit attributable to exempted final products or to pay 10% of the value of exempted goods for using common inputs and input services in the manufacture of both dutiable and exempted goods.
Analysis: Rule 6(3) of the Central Excise Rules, 2004 required an assessee using common inputs and input services for dutiable and exempted goods to either reverse the proportionate credit attributable to exempted goods or pay the prescribed amount on exempted clearances. The assessee had continued to avail credit on common inputs and services without following either course.
Conclusion: The assessee was liable to either reverse the proportionate Cenvat credit or pay 10% of the value of the exempted final products.
Issue (ii): whether the demand was barred by limitation.
Analysis: The facts of common availment of credit were available to the department during an earlier audit, but the later audit found continued non-compliance and the assessee had undertaken to pay the amount and failed to do so. In these circumstances, invocation of the extended period of limitation was upheld.
Conclusion: The demand was not barred by limitation and the extended period of limitation was correctly invoked.
Issue (iii): whether penalty was sustainable.
Analysis: The order found no basis for imposition of penalty in the circumstances of the case.
Conclusion: Penalty was set aside.
Final Conclusion: The liability to pay the amount equivalent to the prescribed consequence under the credit reversal scheme was upheld along with interest, while the penalty was deleted.
Ratio Decidendi: Where common inputs or input services are used for both dutiable and exempted goods, the assessee must comply with the reversal or payment mechanism under Rule 6(3), and limitation can be extended where continued non-compliance justifies invocation of the extended period.
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AI Drafter ✕
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