Proportionate Cenvat credit reversal under Rule 6(3) applies only to common inputs, not total credit

CESTAT Ahmedabad held that under Rule 6(3) and Rule 6(3A) of Cenvat Credit Rules, 2004, proportionate Cenvat credit reversal should be calculated only on common input and input service credits used for both dutiable and exempted goods, not on total Cenvat credit. The appellant's calculation method was deemed correct. Revenue may verify the correctness of reversed credits. The impugned order was set aside and appeal was allowed.

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Issues Involved:
1. Interpretation of Rule 6(3) and Rule 6(3A) of the Cenvat Credit Rules, 2004 regarding the reversal of Cenvat credit.
2. Determination of whether the reversal should be computed on total Cenvat credit or only on common credit.
3. Applicability of amendments and judicial precedents to the present case.
4. Consideration of limitation issues.

Issue-wise Detailed Analysis:

1. Interpretation of Rule 6(3) and Rule 6(3A) of the Cenvat Credit Rules, 2004:
The core issue revolves around the interpretation of Rule 6(3) and Rule 6(3A) of the Cenvat Credit Rules, 2004, which mandates the reversal of Cenvat credit on inputs and input services used in the manufacture of exempted goods. The appellant argued that the respondent misinterpreted these rules by computing the reversal on the total Cenvat credit availed, rather than on the common credit of inputs and input services used for both dutiable and exempted goods. The Tribunal noted that Rule 6(1) restricts the manufacturer from availing Cenvat credit on inputs used for exempted goods, implying that credit should only be taken on inputs related to dutiable goods.

2. Determination of whether the reversal should be computed on total Cenvat credit or only on common credit:
The Tribunal addressed the confusion regarding whether the reversal should be based on the total Cenvat credit or only on the common credit. It was clarified through an amendment via Notification No. 13/2016-CE(NT) dated 01.03.2016, which specified that "total Cenvat credit" refers to the credit availed on common inputs and input services used in the manufacture of both dutiable and exempted goods. The Tribunal emphasized that the total Cenvat credit for the formula in Rule 6(3A) should include only the common credit and not the credit on inputs exclusively used for dutiable goods.

3. Applicability of amendments and judicial precedents to the present case:
The Tribunal referenced several judicial precedents and amendments to support its decision. It highlighted that the amendment to Rule 6(3A) was intended to clarify the provision and should be applied retrospectively. The Tribunal referred to the decision in the case of M/s Reliance Industries Ltd. by the Gujarat High Court, which held that no reversal is required for LPG, a by-product generated during the refining process. The Tribunal found that the issues in the present case were identical to those in previous cases, where the decisions favored the appellant, thereby setting a precedent for the current judgment.

4. Consideration of limitation issues:
Although the appellant raised issues regarding the limitation period, the Tribunal chose not to address them, as the matter was decided on merits. The Tribunal left the limitation issues open for future consideration if necessary.

Conclusion:
The Tribunal concluded that the appellant had correctly calculated and reversed the Cenvat credit as per the interpretation of Rule 6(3A), which considers only the common credit. The impugned order was set aside, and the appeal was allowed. The revenue was granted the liberty to verify the correctness of the credit reversed by the appellant. The judgment was pronounced in the open court on 16.10.2024.

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