Proportionate Cenvat credit reversal with interest can defeat demand and penalty despite procedural lapses under Rule 6.

Reversal of common Cenvat credit attributable to exempted activity, together with interest, was treated as sufficient substantive compliance under Rule 6 of the Cenvat Credit Rules, 2004, even though separate accounts were not maintained and the department was not intimated in the prescribed manner. The procedural lapse was not allowed to defeat proportionate reversal where the credit had already been paid back, because Rule 6 was viewed as preventing wrongful retention of credit and not as a basis for recovering more than the amount actually attributable to exempted services. On that footing, the related demand and penalty were held unsustainable.

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Issues: (i) whether reversal of wrongly availed Cenvat credit along with applicable interest, after detection by audit, entitled the assessee to the benefit of proportionate reversal under Rule 6 of the Cenvat Credit Rules, 2004 despite non-maintenance of separate accounts and non-intimation; (ii) whether the demand and penalty could survive in view of such reversal and payment.

Issue (i): whether reversal of wrongly availed Cenvat credit along with applicable interest, after detection by audit, entitled the assessee to the benefit of proportionate reversal under Rule 6 of the Cenvat Credit Rules, 2004 despite non-maintenance of separate accounts and non-intimation.

Analysis: The dispute concerned common input services used for taxable output services as well as trading activity, with the department alleging non-compliance with the procedure under Rule 6. The record showed that the assessee had reversed the credit amount along with interest. The reasoning treated the object of Rule 6 as preventing wrongful enjoyment of credit on exempted activity, not as a mechanism to recover more than the credit attributable to such activity. The omission to intimate the department or maintain separate accounts was treated as a procedural lapse where the substantive reversal had already been made. The conclusion was supported by the principle that proportionate reversal under Rule 6(3)(ii) read with Rule 6(3A) is sufficient when the credit attributable to exempted services has been paid back with interest.

Conclusion: Yes. The assessee was entitled to the benefit of proportionate reversal, and the procedural lapse did not justify denial of that benefit.

Issue (ii): whether the demand and penalty could survive in view of such reversal and payment.

Analysis: Since the credit attributable to the disputed activity had already been reversed with interest, the foundation for confirming the demand did not survive. On the same reasoning, the penalty imposed under Rule 15(3) of the Cenvat Credit Rules, 2004 read with Section 78 of the Finance Act, 1994 was not sustainable. The overall approach was that substantial compliance had been achieved and the revenue could not insist on the higher demand merely because the prescribed procedure was not followed in full form.

Conclusion: No. The demand and penalty were not sustainable.

Final Conclusion: The departmental appeal failed, the adjudication in favour of the assessee was sustained, and the connected cross-objections stood disposed of.

Ratio Decidendi: Where common Cenvat credit attributable to exempted activity is reversed along with interest, non-compliance with procedural requirements under Rule 6 does not by itself justify a larger demand or penalty beyond the credit actually attributable to the exempted activity.

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