Cenvat credit reversal and limitation: prior payment under Rule 6 and full disclosure defeat further demand and extended time

Where a manufacturer does not maintain separate accounts for inputs used in dutiable and exempted goods and instead pays the prescribed amount on exempted clearances under Rule 6 of the Cenvat Credit Rules, further reversal of credit on inputs alleged to be used exclusively in exempted products is stated to be unsustainable. The text also notes that disclosure of the payment in ER-1 returns and periodic audits without objection negates suppression of facts, so the extended period of limitation cannot be invoked absent intent to evade duty. The impugned order was set aside and the assessee succeeded on both merits and limitation.

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Issues: (i) Whether cenvat credit on inputs allegedly used exclusively in exempted products could be reversed after the assessee had discharged the amount payable under Rule 6(3) of the Cenvat Credit Rules, 2004; and (ii) whether the demand was barred by limitation.

Issue (i): Whether cenvat credit on inputs allegedly used exclusively in exempted products could be reversed after the assessee had discharged the amount payable under Rule 6(3) of the Cenvat Credit Rules, 2004.

Analysis: Rule 6 obliges maintenance of separate accounts where inputs are used for both dutiable and exempted goods, and where separate accounts are not maintained the manufacturer may opt to pay the prescribed amount on exempted goods. Explanation II denies credit on inputs used exclusively in exempted goods, but the controversy turned on whether further reversal could still be demanded after the prescribed amount had already been paid. The assessee had not maintained separate accounts and had paid the percentage amount on exempted clearances. In such circumstances, further insistence on reversal of credit on the same inputs was held to be unsustainable.

Conclusion: The demand for reversal of cenvat credit on the alleged exclusive inputs was not sustainable, and this issue was decided in favour of the assessee.

Issue (ii): Whether the demand was barred by limitation.

Analysis: The assessee had disclosed the payment of the prescribed amount in ER-1 returns, and the unit had been audited periodically without objection. These facts negatived any allegation of suppression of facts with intent to evade duty. In the absence of such suppression, invocation of the extended period was not justified.

Conclusion: The demand was barred by limitation, and this issue was decided in favour of the assessee.

Final Conclusion: The impugned order was set aside and the appeal succeeded on both merits and limitation.

Ratio Decidendi: Where a manufacturer opting not to maintain separate accounts under Rule 6 of the Cenvat Credit Rules, 2004 has already discharged the prescribed amount on exempted clearances, further reversal of credit on the same inputs cannot be demanded, and disclosure of such payment in returns and audits negates extended limitation in the absence of suppression of facts.

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