Cenvat credit reversal on exempt clearances defeats 8% demand, and the claim was also held time barred.

Reversal of Cenvat credit attributable to exempted clearances was treated as equivalent to non-availment of credit, so the demand to pay 8% of the value of exempt final products did not survive. The tribunal also found no basis for invoking the extended period of limitation for a notice issued in 2004 covering clearances from August 2000 to May 2002, and held the demand time barred. The impugned demand, interest, and penalty were set aside, with consequential relief to the assessee.

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Issues: (i) Whether reversal of proportionate Cenvat credit on common inputs used in exempted goods dispensed with the demand to pay 8% of the value of exempted final products. (ii) Whether the demand was barred by limitation.

Issue (i): Whether reversal of proportionate Cenvat credit on common inputs used in exempted goods dispensed with the demand to pay 8% of the value of exempted final products.

Analysis: The appellants had taken credit on common inputs used for both dutiable and exempted goods, but had reversed the credit relatable to the exempted final products. On that factual footing, the case was held to fall outside the statutory obligation to pay 8% of the value of exempted goods. The reasoning treated such reversal as equivalent to not availing credit on the exempted goods at all.

Conclusion: The issue was decided in favour of the assessee and against the Revenue.

Issue (ii): Whether the demand was barred by limitation.

Analysis: The notice was issued on 1.4.2004 for a dispute covering August 2000 to May 2002. On those facts, no basis was found for invoking the longer period of limitation.

Conclusion: The demand was held to be barred by limitation, in favour of the assessee.

Final Conclusion: The impugned demand, interest, and penalty were set aside and the appeal succeeded with consequential relief.

Ratio Decidendi: Reversal of Cenvat credit attributable to exempted clearances is equivalent to non-availment of credit for the purpose of denying a demand based on percentage of exempted turnover, and where the notice covers an old period without a valid basis for extended limitation, the demand is time barred.

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