Cenvat credit on exempted products: Rule 6(3) demand fails where inputs were used only for exempt goods and credit was reversed with interest.

CESTAT held that Rule 6(3) of the Cenvat Credit Rules, 2002 could not sustain a demand where the inputs on which credit was taken were used exclusively in exempted final products and were not shown to have been used in dutiable products. On those facts, Rule 6(2) was inapplicable and the governing restriction was Rule 6(1), which bars credit on inputs used in exempted output. Because the entire credit had already been reversed with interest, no recoverable liability survived in relation to those exempted products. The demand was therefore unsustainable and the issue was decided in favour of the assessee.

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Issues: Whether Cenvat credit demand under Rule 6(3) of the Cenvat Credit Rules, 2002 was sustainable when the inputs were used exclusively in exempted final products and the credit had been reversed with interest.

Analysis: The notice and record showed that the inputs on which credit was taken were used only in the manufacture of exempted products and were not shown to have been used in dutiable final products. On those facts, Rule 6(2) was inapplicable and the consequent demand under Rule 6(3) could not stand. The applicable provision was Rule 6(1), which bars Cenvat credit on inputs used in exempted final products. The entire credit had already been reversed with interest, leaving no recoverable demand in relation to those exempted products.

Conclusion: The demand under Rule 6(3) was not sustainable and the issue was decided in favour of the assessee.

Ratio Decidendi: Where inputs are used exclusively in the manufacture of exempted final products, Rule 6(2) and the consequential demand under Rule 6(3) of the Cenvat Credit Rules, 2002 do not apply, and reversal of the credit with interest removes any surviving liability on that account.

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