P. Karthikeyan, Member (T)

1. The subject appeal seeks to vacate the demand of duty and cess to the tune of Rs. 2,38,45,050/-, interest thereon and penalty equal to the duty amount imposed on the appellants M/s. Sakthi Sugars Limited (SSL for short). The facts of the case are that SSL manufactures sugar, molasses and rectified spirit (Ethyl Alcohol). The assessee clears rectified spirit as such and as denatured spirit. Whereas the rectified spirit is exempted from payment of duty, denatured spirit is subject to excise duty. Molasses which is a by-product emerging in the manufacture of sugar is captively consumed to produce rectified spirit. The assessee availed exemption under Notification No. 67/95 dated 16.3.95 on molasses used in the manufacture of rectified spirit during the period 1.3.2005 to 31.7.2005. Notification No. 67/95-CE is applicable to a commodity subject to the condition that the final products manufactured with the said goods are not exempt from excise duty or are not chargeable to "nil" rate of duty. The exemption is available to inputs used in the manufacture of dutiable and exempted final products after the assessee had discharged the obligation prescribed in Rule 6 of the Cenvat Credit Rules, 2002 (CCR). In the instant case, the assessee had not maintained separate accounts of receipt, issue and inventory of the inputs that went into the manufacture of the exempted and duty paid rectified spirit. Nor did they pay an amount equal to 10% of the sale price of exempted rectified spirit as required in Rule 6 of Cenvat Credit Rules, 2002. The Commissioner concluded that SSL had willfully made misstatements and avoided payment of duty on molasses. Accordingly, he passed the impugned order demanding duty on the molasses consumed in the manufacture of rectified spirit during the period 1.3.2005 to 31.7.2005.

2. At the time of hearing, the ld. Sr. Counsel appearing on behalf of SSL submitted that in order to avail the exemption in terms of Notification No. 67/95 dated 16.3.95 where the final products were cleared on payment of duty as well as under exemption, the assessee was required to discharge certain obligations as prescribed in Rule 6 of CCR, 2002. As per Sub-rule (3)(a)(i) of Rule 6 of Cenvat Credit Rules, 2002, if the manufacturer did not maintain separate accounts of receipt, issue and inventory of inputs going into the manufacture of dutiable and exempted final products, he should pay an amount equivalent to the cenvat credit taken on the inputs used in the manufacture of the final products if such final products fell under Heading No. 22.04 of the I Schedule to the CETA 1985. In the instant case the final products were rectified spirit (Ethyl Alcohol) of Heading No. 22.04 of the CET. The ld. Counsel submitted that the appellants had reversed input credit availed during the material period to the tune of Rs. 6,71,555/- and produced certificate to that effect obtained from the jurisdictional range Superintendent. He claimed that in view of the reversal of input credit, the assessee was eligible for the exemption sought to be recovered and the impugned order was hence liable to be set aside.

3. Ld. SDR justified the impugned order and. reiterated the reasoning followed by the Commissioner.

4. We have carefully considered the case records and the rival submissions. We find that disposing a couple of appeals involving similar facts the Bangalore Bench of the Tribunal in para 7.2 of its Final Order No. 56 to 59/07 dated 30.11.06 made the following observations:

7.2. It is the contention of the appellants that the reversal satisfies the conditions of Notification 67/95 read with Rule 6 of Cenvat Credit Rules, 2002. Notification 67/95 grants exemption from payment of duty on an intermediary product which is captively consumed for manufacture of excisable goods. Molasses is an excisable product. When molasses is used in the manufacture some other excisable product, then the molasses captively consumed need not discharge any duty burden. However, the entitlement to Notification 67/95 is subject to a condition. The condition is that the final product should be dutiable or otherwise the exemption would not be applicable. According to Revenue when molasses is used in the manufacture of Rectified Spirit, the Rectified Spirit, which emerges, is not excisable. Therefore, the Notification benefit cannot be available. This is the main contention of the Revenue for denying the benefit of Notification to molasses captively consumed. However, it is the appellants contention that the molasses is not completely used for the production of exempted/non-dutiable product because a part of Rectified Spirit is converted to Denatured Spirit which is dutiable. Our attention was invited to amendment to Notification No. 67/95-CE by Notification No. 31/2001-CE dated 1.1.2001. In terms of the said amendment, the appellants are entitled for the benefit of the exemption Notification in a situation where there is manufacture of both dutiable and exempted final product, provided the manufacturer discharges the obligation prescribed in Rule 57AD of the Central Excise Rules, 1944 which is part material with Rule 6 of the Cenvat Credit Rules, 2002. This is the point urged by the appellant. What is the obligation under Rule 6 of the Cenvat Credit Rules 2002 The obligation under Rule 6 of Cenvat Credit Rules is that when a manufacturer uses input both for exempted and dutiable final products, he should maintain separate accounts because no cenvat credit is available for the inputs used in exempted products. There is an option for the manufacturer not to maintain two separate accounts. Once he exercises the option, it is sufficient if he pays 10% of the sale price of the exempted products. But certain goods have been specified in respect of which the obligation would be to reverse the credit attributable to the inputs used in the manufacture of exempted final products. In the present case, Rule 6(3)(a)(i) specifically refers to goods failing under 22.04 of the First Schedule (presently 22 07 20). In other words, where the final product is Ethyl Alcohol and other spirits denatured of any strength, it is sufficient if the cenvat credit attributable to inputs in the exempted product is reversed or paid. This obligation, from the records of the case appears to have been discharged in respect of all the appellants. Therefore, the appellants are entitled to the benefit of Notification No. 67/95 in respect of molasses used captively for manufacture of Rectified Spirit and Denatured Spirit. Therefore the demand of duty in respect of the credit taken on molasses is not correct.

The above observations squarely cover the subject case. Following the ratio of the above decision, we allow the subject appeal filed by SSL.

(Operative part of the order pronounced in open Court on 26.6.07)