Common input credit rules permit 8% recovery on exempted goods, but penalty was set aside in an interpretive dispute.

Where common inputs are used for dutiable and exempted goods and separate accounts are not maintained, Rule 57AD authorises recovery of an amount equal to 8% of the price of the exempted final products, and a circular cannot override that statutory mandate. The Tribunal upheld the demand on exempted products because the rule itself provided the recovery mechanism. On penalty, the dispute was treated as one of legal interpretation, so penal consequences were not justified and the penalty was set aside.

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Issues: (i) whether the manufacturer was liable to pay an amount equal to 8% of the price of exempted final products where common inputs were used and separate accounts were not maintained; (ii) whether penalty was imposable in the circumstances.

Issue (i): whether the manufacturer was liable to pay an amount equal to 8% of the price of exempted final products where common inputs were used and separate accounts were not maintained.

Analysis: Rule 57AD of the Central Excise Rules, 1944 required that Cenvat credit would not be available on inputs used in exempted goods, and where a manufacturer used inputs both for dutiable and exempted products, separate accounts for receipt, consumption and inventory had to be maintained. If such separate accounts were not maintained, the rule itself mandated payment of an amount equal to 8% of the total price of the exempted final products. The Board circular could not override the statutory prescription, and the machinery for recovery was found within the rule itself.

Conclusion: The manufacturer was liable to pay an amount equal to 8% of the price of the exempted final products, in favour of Revenue.

Issue (ii): whether penalty was imposable in the circumstances.

Analysis: The dispute turned on interpretation of the relevant credit provisions, and the Tribunal accepted that the controversy was essentially legal in nature. In such a setting, the penal consequence was not warranted.

Conclusion: Penalty was not imposable, in favour of the assessee.

Final Conclusion: The demand of 8% on exempted products was upheld, but the penalty was set aside.

Ratio Decidendi: Where common inputs are used for both dutiable and exempted goods and separate accounts are not maintained, the statutory rule itself authorises recovery of the prescribed percentage on exempted goods, but penalty is not justified where the dispute is one of interpretation.

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