CENVAT credit on common inputs retained where prescribed Rule 6(3) payment was made and exclusive exempt use was not shown.

CENVAT credit on imported common inputs could not be denied or reversed where the manufacturer did not maintain separate accounts for inputs used in dutiable and exempted clearances but had discharged the prescribed amount under Rule 6(3) of the CENVAT Credit Rules. The applicable principle was that Rule 6(1) bars credit only for inputs used exclusively in exempted final products, while Rule 6(3) permits payment of the specified percentage on exempted clearances when separate accounts are not maintained. Because the inputs were used in identical gear-motor assemblies cleared both with duty and without duty, and exclusive use for exempted goods was not shown, the credit was retained and the connected demand for reversal, penalty, and interest could not survive.

---

---

Issues: Whether CENVAT credit on imported inputs could be denied or ordered to be reversed when the manufacturer did not maintain separate accounts for inputs used in dutiable and exempted clearances but paid the prescribed percentage of the sale price under Rule 6(3) of the CENVAT Credit Rules, 2001/2002/2004.

Analysis: The dispute turned on the interaction between Rule 6(1), which restricts credit in relation to exempted final products, and Rule 6(3), under which a manufacturer who does not maintain separate accounts may discharge the prescribed percentage amount on exempted clearances. The inputs covered by the demand were used in the manufacture of identical gear-motor assemblies cleared both on payment of duty and without payment of duty, and the assessee had already paid the amount contemplated by Rule 6(3). On these facts, the condition for denying credit or compelling reversal was not satisfied, including for the period after the insertion of Explanation III, because the goods were not shown to be used exclusively for exempted clearances.

Conclusion: The assessee was entitled to retain the CENVAT credit and the demand for reversal, together with the connected penalty and interest, could not survive.

Ratio Decidendi: Where a manufacturer does not maintain separate accounts for common inputs and pays the amount prescribed under Rule 6(3), CENVAT credit on such inputs cannot be denied unless the inputs are shown to be exclusively used for exempted final products in a manner attracting the bar in Rule 6(1).

---