Common-inputs credit reversal defeats further notional demand where exempted-credit reversal already covers the exempt clearances.

Where common inputs were used for both dutiable and exempted clearances and separate accounts were not maintained, the dispute turned on the common-inputs credit reversal scheme. The article states that once the credit attributable to exempted clearances had already been reversed, that reversal was treated as equivalent to non-availment of credit. On that basis, insisting on a further notional demand calculated at 8% of sale value was held to lack justification, particularly when the exempted clearances formed only a small part of production and the reversed credit was far lower than the demand sought to be enforced. The demand was therefore treated as unsustainable.

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Issues: Whether the demand of 8% of sale value under the common-inputs credit reversal scheme was sustainable when the credit attributable to exempted clearances had already been reversed and the assessee had not maintained separate accounts for inputs used in dutiable and exempted goods.

Analysis: The goods were manufactured with common inputs for both dutiable and exempted clearances, and separate input accounts were not maintained, so the case fell within the common-inputs reversal scheme. However, the exempted clearances were only a small part of the total production, the credit relatable to the exempted goods had already been reversed, and the monetary amount of such credit was far lower than the 8% demand sought to be enforced. Reversal of the credit attributable to exempted goods was treated as equivalent to non-availment of credit, and on that basis there was no justification for insisting on a notional demand of 8% of the sale value.

Conclusion: The demand of 8% was unsustainable and was set aside in favour of the assessee.

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