Cenvat credit on common inputs stayed available where dutiable and exempted watches were both manufactured without separate accounts.

Cenvat credit on common inputs remained admissible where a manufacturer produced both dutiable and exempted watches in the same business activity and did not maintain separate accounts. Rule 57AD(1) barred credit only for inputs used exclusively in exempted goods, while Rule 57AD(2) applied to mixed manufacture and restricted credit only to inputs intended for dutiable goods; if separate accounts were not maintained, the rule contemplated payment linked to exempted clearances. The exemption for certain watches did not require day-to-day simultaneous production of both categories. On the stated record, the manufacturer continued both lines of production, so credit was not disallowable and the demand could not stand.

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Issues: Whether Cenvat credit on common inputs was admissible when the manufacturer cleared exempted wrist watches during a period in which both dutiable and exempted watches were manufactured in the course of the same business activity.

Analysis: Rule 57AC of the Central Excise Rules, 1944 permitted availment of credit on specified inputs. Rule 57AD(1) denied credit only on inputs used in the manufacture of exempted goods, while Rule 57AD(2) applied where final products were both dutiable and exempted and separate accounts were not maintained, in which event credit could be taken only on inputs intended for dutiable goods or, where separate accounts were not maintained, an amount equal to 8% of the price of exempted goods was payable. The exempting notification for watches up to the specified retail price came into force on 1-3-2000, the classification declaration covered both categories of watches, and the record did not show that the manufacturer had abandoned production of dutiable watches. Rule 57AD(2) did not require day-to-day simultaneous production of both categories; it was enough that the manufacturer was engaged in both kinds of manufacture and was not maintaining separate accounts.

Conclusion: Credit was not disallowable to the assessee and the demand could not be sustained.

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