Reversal of Cenvat credit on exempted clearances can satisfy Rule 6 compliance; penalty needs proof of intent to evade.

Reversal of Cenvat credit attributable to exempted clearances was treated as sufficient compliance with Rule 6 of the Cenvat Credit Rules, even where separate accounts for common inputs and input services were not maintained. The note explains that such reversal neutralises the effect of common credit used for exempted goods, and that interest paid along with reversal supports compliance. It also states that, where the underlying credit is reversed, the basis for consequential demand falls away. Penalty is described as unsustainable in the absence of reliable finding of suppression, dishonesty, or intent to evade, especially where the legal position remained debatable.

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Issues: (i) Whether reversal of Cenvat credit attributable to exempted clearances was sufficient compliance with Rule 6 of the Cenvat Credit Rules, 2002 and the Cenvat Credit Rules, 2004 despite non-maintenance of separate accounts for common inputs and input services; (ii) Whether the demand, interest, and equal penalty were sustainable.

Issue (i): Whether reversal of Cenvat credit attributable to exempted clearances was sufficient compliance with Rule 6 of the Cenvat Credit Rules, 2002 and the Cenvat Credit Rules, 2004 despite non-maintenance of separate accounts for common inputs and input services.

Analysis: Rule 6 prohibits availment of credit on inputs and input services used in exempted goods, while permitting credit only to the extent relatable to dutiable clearances where separate accounts are maintained. The legal effect of reversal of the credit relatable to exempted goods is that the anomaly arising from common credit is neutralised. The Tribunal treated the reversal made by the assessee, together with payment of interest, as adequate compliance with Rule 6. The reliance placed on a decision concerning a different question under the earlier Rule 57CC was held to be misplaced, as that issue did not decide the present controversy.

Conclusion: Reversal of the attributable credit was held to be sufficient compliance, and the demand was not sustainable.

Issue (ii): Whether the demand, interest, and equal penalty were sustainable.

Analysis: Once the credit relatable to exempted goods had been reversed, the foundation for the demand disappeared. On penalty, the dispute turned on an area of the law that had been interpreted differently in several decisions, showing that the assessee's liability was debatable. In the absence of reliable finding of dishonest conduct or intent to evade, penalty could not be justified.

Conclusion: The demand, interest, and penalty were set aside.

Final Conclusion: The assessee was held not liable to the impugned demand or penalty, and the appeal was allowed.

Ratio Decidendi: Where credit attributable to exempted clearances is reversed, Rule 6 compliance is achieved and consequential demand and penalty cannot be sustained absent deliberate suppression or intent to evade.

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