2008 (2) TMI 677 - AT - Central Excise

Summary

Issues:
Manufacture of exempted products, availing Cenvat credit without separate accounts, demand under Rule 6(3) of Cenvat Credit Rules, reversal of credit, penalty imposition, applicability of Rule 6(2) and Rule 6(1) of Cenvat Credit Rules.

Analysis:

Manufacture of Exempted Products:
The appellants were engaged in manufacturing medicaments falling under Heading 30.03 of the Schedule to the Central Excise Tariff Act, including Pyrazinamide I.P. and Isoniazid I.P., both unconditionally exempted from duty. They initially availed SSI exemption but crossed the limit and started availing Cenvat credit on inputs used in manufacturing exempted products without maintaining separate accounts for inputs used in dutiable and exempted products.

Demand under Rule 6(3) of Cenvat Credit Rules:
The department alleged that Cenvat credit was taken on common inputs without separate accounts as required by Rule 6(2) of the Cenvat Credit Rules, leading to a demand of 8% of the sale price of exempted final products. The original authority confirmed the demand under Section 11A of the Central Excise Act and Rule 12 of the Cenvat Credit Rules, invoking the extended period of limitation and imposing a penalty.

Applicability of Rule 6(2) and Rule 6(1) of Cenvat Credit Rules:
The appellants argued that Rule 6(2) was not applicable as the inputs were exclusively used in manufacturing exempted products. They contended that the entire credit had been reversed with interest, making enforcement under Rule 6(3)(b) invalid. The Tribunal found that Rule 6(2) was wrongly invoked as the inputs were solely used in exempted product manufacture, making Rule 6(1) applicable, which disallows Cenvat credit on inputs for duty-exempt products.

Reversal of Credit and Penalty Imposition:
The party had already reversed the credit with interest, which was appropriated towards the demand. The Tribunal held that since the credit was reversed, no demand could be enforced under Rule 6(1). The case was distinguished from previous decisions where inputs were used in both dutiable and exempted products.

Conclusion:
The Tribunal found the demand unsustainable under Rule 6(3) as the case fell under Rule 6(1) due to the reversal of credit. The decision was made without reliance on case law, emphasizing that the demand could not be upheld. Consequently, the impugned order was set aside, providing relief to the appellants.