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Issues: (i) whether reversal of proportionate Cenvat credit on common inputs used in exempted goods removes the liability to pay 8% of the value of exempted clearances; and (ii) whether the demand was barred by limitation.
Issue (i): whether reversal of proportionate Cenvat credit on common inputs used in exempted goods removes the liability to pay 8% of the value of exempted clearances.
Analysis: The inputs were commonly used for dutiable and exempted goods, but the credit attributable to inputs used in the exempted final products had been reversed. On that footing, the matter fell outside the requirement to pay 8% of the value of exempted goods under Rule 57AD(2) of the Central Excise Rules, 1944 read with Rule 6(3) of the Cenvat Credit Rules, 2001/2002. Reversal of the credit was treated as equivalent to not having taken the credit in the first place.
Conclusion: The liability to pay 8% of the value of exempted clearances was not attracted, and the finding was in favour of the assessee.
Issue (ii): whether the demand was barred by limitation.
Analysis: The show cause notice was issued on 1.4.2004, whereas the disputed period was August 2000 to May 2002. On those dates, there was no basis for invoking the longer period.
Conclusion: The demand was time-barred, and the finding was in favour of the assessee.
Final Conclusion: The demand and penalty were unsustainable, and the appeal succeeded with consequential relief.
Ratio Decidendi: Reversal of Cenvat credit attributable to exempted goods is treated as non-availment of credit, and in the absence of a valid basis for extended limitation, a demand raised beyond the normal period cannot be sustained.
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