Common-input use for exempt by-products attracts separate accounts under Cenvat rules; 8% demand and penalty sustained.

Where common inputs were used in refining dutiable oil and exempted acid oil emerged regularly as a by-product, the manufacturer was treated as producing the exempted goods in the ordinary course of manufacture, so the obligation to maintain separate accounts under the Cenvat Credit Rules applied. Non-compliance attracted the consequence under Rule 6(3)(b), and the demand of 8% on the exempted clearances was sustained. The penalty under Rule 13(1) was also maintained, as the minimum penalty prescribed was applied and no separate basis was found to interfere with it.

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Issues: (i) Whether, where common inputs were used in the manufacture of dutiable refined oil and exempted acid oil emerged regularly as a by-product, the assessee was liable to pay 8% of the total price of the exempted clearances under Rule 6(3)(b) of the Cenvat Credit Rules, 2002 for not maintaining separate accounts under Rule 6(2). (ii) Whether the penalty of Rs. 10,000 imposed under Rule 13(1) of the Cenvat Credit Rules, 2002 was sustainable.

Issue (i): Whether, where common inputs were used in the manufacture of dutiable refined oil and exempted acid oil emerged regularly as a by-product, the assessee was liable to pay 8% of the total price of the exempted clearances under Rule 6(3)(b) of the Cenvat Credit Rules, 2002 for not maintaining separate accounts under Rule 6(2).

Analysis: The inputs such as phosphoric acid, sodium hydroxide and similar chemicals were used in the refining process, and acid oil arose as a regular and continuous by-product in the course of manufacture. The record showed that the by-product was not an accidental or unwanted emergence, but a recurring result of the manufacturing process and was cleared as exempted goods under Notification No. 115/75-CE. On that footing, the situation attracted the principle that where common inputs are used and exempted goods are produced as part of the intended manufacturing activity, the obligation to maintain separate accounts and the consequence prescribed by Rule 6(3)(b) follow.

Conclusion: The invocation of Rule 6(3)(b) was upheld and the demand of 8% on the exempted clearances was sustained against the assessee.

Issue (ii): Whether the penalty of Rs. 10,000 imposed under Rule 13(1) of the Cenvat Credit Rules, 2002 was sustainable.

Analysis: Rule 13(1) was applied as the provision governing penalty in the circumstances of the case, and the order recorded that the minimum penalty under that rule was Rs. 10,000. No separate factual basis was accepted for interfering with the penalty once the main demand was upheld.

Conclusion: The penalty under Rule 13(1) was sustained.

Final Conclusion: The appeal failed in full, and the recovery based on non-maintenance of separate accounts for common inputs used in producing exempted by-products, along with the penalty, remained in force.

Ratio Decidendi: Where exempted goods arise regularly as a by-product in the course of manufacture using common inputs, the manufacturer is treated as having produced the by-product in the intended course of business, attracting the obligation to maintain separate accounts and the consequence prescribed for non-compliance.

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