Cenvat credit on exempted goods and common inputs remains restricted, with duty-paid adjustment allowed where facts support it.

Cenvat credit is inadmissible on inputs and capital goods used exclusively to manufacture exempted goods. Where common inputs are used for both dutiable and exempted clearances but the prescribed option under the credit rules is not exercised, liability under the rule governing exempted clearances remains enforceable. The text also states that duty actually paid on exempted goods may be adjusted against the overall demand where the factual position and statutory scheme support that treatment. On that basis, the demand and credit denial were sustained, while the adjustment of duty paid on exempted goods was also accepted.

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Issues: Whether Cenvat credit taken on inputs and capital goods used exclusively in the manufacture of exempted goods was inadmissible, whether the assessee's failure to comply with the procedure for common inputs attracted liability under the prescribed percentage payment for exempted clearances, and whether the actual duty paid on exempted goods could be adjusted against the demand.

Analysis: The record showed that credit had been availed on raw materials and capital goods used exclusively for exempted products, which fell within the prohibition against credit on inputs and capital goods used for exempted manufacture. For common inputs used in both dutiable and exempted goods, the prescribed option under the credit rules had not been exercised, so the liability under the rule governing exempted clearances remained payable. The authority also noted that the duty had in fact been paid on the exempted goods and permitted adjustment of that amount against the overall liability, and this adjustment was found to be consistent with the factual position and the statutory scheme.

Conclusion: The demand and denial of credit were upheld, and the adjustment of duty actually paid on exempted goods was also sustained.

Final Conclusion: The impugned order was affirmed in substance, with the revenue's challenge to the adjustment failing and the assessee's challenge to the credit demand also failing.

Ratio Decidendi: Cenvat credit is not admissible on inputs or capital goods used exclusively in the manufacture of exempted goods, and where common inputs are used without complying with the prescribed option, the statutory liability on exempted clearances remains enforceable, while duty actually paid on exempted goods may be adjusted if the facts so justify.

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