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Issues: (i) Whether the demand under Rule 6 of the Cenvat Credit Rules, 2004 could be sustained by applying the percentage reversal mechanism where the assessee had availed only proportionate credit and capital goods credit; (ii) whether the extended period of limitation could be invoked in the absence of suppression or wilful misstatement.
Issue (i): Whether the demand under Rule 6 of the Cenvat Credit Rules, 2004 could be sustained by applying the percentage reversal mechanism where the assessee had availed only proportionate credit and capital goods credit.
Analysis: The credit taken on capital goods formed the major part of the disputed amount. Rule 6(4) permits capital goods credit unless such goods are used exclusively for exempted services, and therefore common use does not by itself justify denial of credit. The remaining credit was shown to be only proportionate credit relatable to taxable output services, which is permissible under Rule 6(3)(ii) and the procedure under Rule 6(3A). The percentage-based demand on the entire exempted turnover was therefore inconsistent with the statutory scheme.
Conclusion: The demand on merits was unsustainable and the issue was decided in favour of the assessee.
Issue (ii): Whether the extended period of limitation could be invoked in the absence of suppression or wilful misstatement.
Analysis: The assessee was registered, filing ST-3 returns, and the relevant credit pattern was reflected in the records. The controversy arose from interpretation of the applicable Rule 6 framework rather than from any concealment of material facts. Since the Department did not establish any positive act of suppression with intent to evade tax, invocation of the extended period was not justified.
Conclusion: The extended period was not invocable and the issue was decided in favour of the assessee.
Final Conclusion: The impugned demand and penalty could not survive either on merits or on limitation, and the appeal succeeded with consequential relief.
Ratio Decidendi: Where an assessee has taken only proportionate Cenvat credit and the capital goods credit is not hit by the exclusivity bar under Rule 6(4), a blanket percentage demand on exempted turnover is impermissible; in the absence of suppression or wilful misstatement, the extended period cannot be invoked.
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