Proportionate reversal of common input credit before exempt clearances can neutralise a separate demand under Rule 57AD.

Where common inputs are used for both dutiable and exempted goods and segregation is impracticable, reversal of the proportionate credit attributable to exempted clearances before removal is treated as equivalent to non-availment of credit. On those facts, insisting on an 8% demand on the value of exempted clearances under Rule 57AD was not warranted, because the inadmissible credit had already been neutralised by reversal and the department did not dispute the reversal formula. The demand was therefore unsustainable against the assessee.

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Issues: Whether reversal of proportionate input duty credit before clearance of exempted goods, where common inputs are used for both dutiable and exempted products and separate segregation is not possible, protects the assessee from a demand of 8% of the value of exempted clearances under Rule 57AD of the Central Excise Rules, 1944.

Analysis: The dispute concerned nitrogen gas received through pipeline and used commonly for dutiable and non-dutiable lamps, with no practical method of segregation and no separate accounts maintained. The assessee had reversed the proportionate credit attributable to exempted lamps before their clearance. The Tribunal held that the spirit of Rule 57AD is to deny credit relatable to exempted final products, but where the inadmissible credit is reversed before clearance, the effect is the same as non-availment of credit. The Tribunal also noted that the department did not dispute the formula used for reversal and that insisting on 8% of the value of exempted clearances would be unjust in the facts of the case.

Conclusion: The reversal of proportionate credit before clearance was sufficient, and the demand of 8% of the value of exempted clearances was unsustainable. The issue was decided in favour of the assessee.

Ratio Decidendi: Where common inputs are used for both dutiable and exempted goods and the inadmissible credit attributable to exempted goods is reversed before clearance, the credit is treated as not taken and a separate demand on the value of exempted clearances is not warranted.

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