Show cause notice limits and Cenvat credit reversal principles bar fresh demand, lapse, and exclusive-use denial.

A demand cannot be confirmed on a ground not stated in the show cause notice, and a noticee must be put to the specific charge before liability is sustained. Where credit attributable to exempted goods had already been reversed and the earlier proceedings had attained finality, the further 10% demand under Rule 6(3) could not survive. Rule 11(3) did not apply because the assessee continued to manufacture and clear dutiable goods, so the balance credit was not treated as lapsed. Credit on capital goods was also not denied, as the evidence showed they were not used exclusively for exempted manufacture.

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Issues: (i) whether the adjudication order could confirm demand on a ground not proposed in the show cause notice; (ii) whether the 10% demand under Rule 6(3) of the Cenvat Credit Rules, 2004 survived after the credit attributable to exempted goods had already been reversed and attained finality; (iii) whether the balance Cenvat credit as on the date of opting for exemption could be treated as lapsed under Rule 11(3) of the Cenvat Credit Rules, 2004 when the assessee also manufactured dutiable goods; and (iv) whether Cenvat credit on capital goods could be denied on the footing that they were used exclusively for exempted goods.

Issue (i): whether the adjudication order could confirm demand on a ground not proposed in the show cause notice.

Analysis: The notice proposed a demand under Rule 6(3) on the allegation of use of common input services in exempted and dutiable clearances, but the adjudication order proceeded on a different basis by invoking lapse of balance credit under Rule 11(3). A demand founded on a new and different charge, without putting the noticee to notice, cannot be sustained.

Conclusion: The demand was held unsustainable because the adjudication order travelled beyond the scope of the show cause notice.

Issue (ii): whether the 10% demand under Rule 6(3) of the Cenvat Credit Rules, 2004 survived after the credit attributable to exempted goods had already been reversed and attained finality.

Analysis: The record showed that in earlier proceedings the credit attributable to inputs and input services used in exempted goods had already been reversed and the remaining dispute stood concluded. Once the entire attributable credit had been reversed and the prior proceedings had attained finality, the foundation for demanding 10% of the value of exempted goods disappeared.

Conclusion: The 10% demand under Rule 6(3) was held not sustainable.

Issue (iii): whether the balance Cenvat credit as on the date of opting for exemption could be treated as lapsed under Rule 11(3) of the Cenvat Credit Rules, 2004 when the assessee also manufactured dutiable goods.

Analysis: Rule 11(3) operates where the final product has become fully exempt and the accumulated credit is not available for use on other dutiable outputs. Here, the assessee continued to manufacture and clear dutiable goods along with exempted goods, so the carried-forward credit remained available for utilisation against duty liability on the dutiable final products. The rule was therefore inapplicable on these facts.

Conclusion: The demand treating the balance credit as lapsed was held not recoverable.

Issue (iv): whether Cenvat credit on capital goods could be denied on the footing that they were used exclusively for exempted goods.

Analysis: The evidence showed that the same capital goods had been used earlier when the finished products were dutiable, and the goods were also cleared under a duty-paying notification before exemption. On that factual matrix, the capital goods were not used exclusively for exempted manufacture, and denial of credit on that premise was unsustainable.

Conclusion: The demand relating to capital goods was held not sustainable.

Final Conclusion: The impugned demand and penalties failed on all substantial grounds, and the order under challenge was set aside.

Ratio Decidendi: An adjudication cannot sustain a demand on a ground not proposed in the show cause notice, and Cenvat credit cannot be denied by invoking lapse or exclusive-use restrictions where the assessee continues to manufacture dutiable goods and the relevant credit has already been reversed or the capital goods were not used exclusively for exempted manufacture.

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