2008 (2) TMI 107 - AT - Central Excise

Credit availed on inputs used in the mfg. of exempted & dutiable final products without maintaining separate accounts of inputs as required u/r 6(2) revenue alleged that appellants were liable to pay 8% of the sale price of the exempted goods - since input duty credit was reversed (with interest), there can be no demand on the appellants with reference to the exempted final products - this case is covered by Rule 6(1) not by Rule 6(2) hence demand u/r 6(3) cannot be sustained

Summary

Issues:
1. Applicability of Rule 6(2) of the Cenvat Credit Rules regarding availing Cenvat credit on common inputs used in the manufacture of exempted and dutiable final products.
2. Maintenance of separate accounts for inputs used in manufacturing exempted and dutiable final products.
3. Enforcement of demand under Rule 6(3)(b) of the Cenvat Credit Rules after reversal of credit with interest.
4. Interpretation of Rule 6(1) in cases where final products are exempted from duty.

Analysis:
1. The case involved the appellants, engaged in manufacturing medicaments falling under Heading 30.03 of the Central Excise Tariff Act, including products unconditionally exempted from duty. The issue arose when the department alleged that the appellants availed Cenvat credit on inputs used in manufacturing exempted final products without maintaining separate accounts, as required under Rule 6(2) of the Cenvat Credit Rules. The original authority confirmed the demand under Section 11A of the Central Excise Act, invoking the extended period of limitation based on suppression of facts. The appellants contended that Rule 6(2) was not applicable as the inputs were exclusively used in the exempted products, and the entire credit had been reversed with interest. The Tribunal found that Rule 6(1) was applicable in this case, as the inputs were solely used in exempted final products, leading to the reversal of credit with interest.

2. The appellants argued that they maintained elaborate accounts for inputs meant for various final products, dutiable or not, as required by the Drugs Control Order. They contended that these maintained separate accounts should be considered for the purpose of Rule 6(2) of the Cenvat Credit Rules. The Tribunal acknowledged the separate accounts maintained by the appellants and found that in such a situation where separate accounts were indeed maintained, any demand under Rule 6(3) would not be sustainable.

3. The department issued a show-cause notice demanding payment based on the alleged violation of Rule 6(2) of the Cenvat Credit Rules. The appellants reversed the entire credit taken on inputs used in manufacturing exempted final products, along with interest. The Tribunal held that since the credit was reversed with interest, there could be no demand enforced under Rule 6(3)(b) of the Cenvat Credit Rules, as the applicable provision in this case was Rule 6(1).

4. The Tribunal concluded that the demand raised under Rule 6(3) could not be sustained, as the inputs were exclusively used in the manufacture of exempted final products. The case was distinguished from previous decisions where inputs were used in both dutiable and exempted final products. The Tribunal set aside the impugned order, allowing the appeal based on the reversal of credit with interest and the inapplicability of Rule 6(2) in this scenario.