CENVAT credit lapse and rule 6 demands rejected where separate accounts and export under bond protected the assessee

Rule 11(3) of the CENVAT Credit Rules, 2004 does not cause lapse of accumulated credit where only some final products become exempt and other dutiable products continue to be manufactured from common inputs; the balance remains usable for duty payment on dutiable clearances, so the lapse demand was unsustainable. Rule 6(3) also does not permit a fixed percentage demand on exempted domestic clearances where separate accounts are maintained and no credit is taken on inputs used exclusively for exempt goods; that demand was therefore not recoverable. Goods exported under bond are excluded from rule 6(3) by rule 6(6)(v), so no percentage-based demand could be raised on such exports. The order dropping the proceedings was upheld in full.

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Issues: (i) Whether the CENVAT credit balance lying as on 01.03.2008 lapsed under rule 11(3) of the CENVAT Credit Rules, 2004 when the assessee manufactured both dutiable and exempted final products from common inputs; (ii) Whether an amount equal to 10%/5% of the value of exempted goods cleared in the domestic market could be demanded under rule 6(3) of the CENVAT Credit Rules, 2004 despite maintenance of separate accounts and non-availment of credit on inputs used exclusively for exempted clearances; (iii) Whether an amount equal to 10%/5% of the value of exempted goods exported under bond could be demanded under rule 6(3) of the CENVAT Credit Rules, 2004.

Issue (i): Whether the CENVAT credit balance lying as on 01.03.2008 lapsed under rule 11(3) of the CENVAT Credit Rules, 2004 when the assessee manufactured both dutiable and exempted final products from common inputs.

Analysis: Rule 11(3) applies where the final product itself becomes wholly exempt and the credit relatable to inputs in stock, in process, or contained in stock is required to be reversed. The assessee was manufacturing more than one final product from common inputs, and only some products had become exempt while others continued to remain dutiable. The credit could still be utilised for payment of duty on the dutiable final products under rule 3(4), and the rule could not be read to compel lapse of the remaining balance in such a situation.

Conclusion: The credit balance did not lapse under rule 11(3), and the demand on this count was rightly dropped.

Issue (ii): Whether an amount equal to 10%/5% of the value of exempted goods cleared in the domestic market could be demanded under rule 6(3) of the CENVAT Credit Rules, 2004 despite maintenance of separate accounts and non-availment of credit on inputs used exclusively for exempted clearances.

Analysis: Rule 6(3) gives an option to the assessee; it does not authorise the department to impose that option by demanding a fixed percentage of the value of exempted goods. The assessee maintained separate records and had not taken credit on inputs used exclusively for exempted goods cleared domestically. In such circumstances, the demand under rule 6(3) was unsustainable, and the fact that some amount had been deposited for a few months did not amount to a binding exercise of option for the entire year.

Conclusion: The domestic-clearance demand under rule 6(3) was not recoverable and was correctly dropped.

Issue (iii): Whether an amount equal to 10%/5% of the value of exempted goods exported under bond could be demanded under rule 6(3) of the CENVAT Credit Rules, 2004.

Analysis: Rule 6(6)(v) excludes goods removed without payment of duty for export under bond from the operation of rule 6(3). The exports were made under bond and were accepted by the proper officer, and the show cause notices did not allege any legally sustainable basis to deny the benefit of the export exemption framework. Accordingly, the percentage-based demand on exported goods was not tenable.

Conclusion: The demand on exported goods was unsustainable and was rightly dropped.

Final Conclusion: The order dropping the proceedings was upheld in full, and the department's appeals failed on all counts.

Ratio Decidendi: Rule 11(3) does not cause lapse of credit where only some products become exempt and the credit remains utilizable for dutiable final products, while rule 6(3) cannot be invoked to compel a percentage payment where separate accounts are maintained or where the clearances are exports under bond covered by rule 6(6)(v).

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