Tax rebate on manufacturing inputs cannot be cut down merely because a tax-free by-product is also produced.

Tax rebate on cotton seeds used in manufacturing oil could not be reduced merely because a tax-free by-product also emerged, unless the facts allowed segregation of the quantity used for taxable and non-taxable outputs. The text explains that the earlier Supreme Court-based approach in Bharat Petroleum Corporation Ltd. had accepted full statutory relief where goods purchased on tax were used in manufacturing taxable goods for sale, and concurrent use for another tax-free item did not by itself justify pro rata restriction. The contrary Tribunal view was treated as a misreading of that principle, making the refusal of full rebate and adoption of proportionate relief unsustainable; the matter was therefore remitted for fresh decision by a speaking order.

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Issues: Whether the petitioner was entitled to full rebate on the tax paid on cotton seeds used in manufacturing oil despite the emergence of a tax-free by-product, and whether the Tribunal's contrary view was unsustainable in light of the earlier decision applying the Supreme Court's ruling in Bharat Petroleum Corporation Ltd.

Analysis: The petitioner had claimed rebate on the entire tax paid on the raw material used in manufacture, but the authorities had granted only proportionate relief on the basis that the process yielded both taxable and tax-free products. The Court noted that an earlier Tribunal order in a materially identical case had accepted the Supreme Court's ruling in Bharat Petroleum Corporation Ltd. and had directed re-examination, whereas the impugned order in the present case took the opposite view on the same reasoning. The Court held that the two Tribunal orders were ex facie contradictory and that the impugned order reflected a misreading of the Supreme Court decision. The governing principle drawn from Bharat Petroleum Corporation Ltd. was that where goods purchased on payment of tax are used in the manufacture of taxable goods for sale, concurrent use in the manufacture of another item, even if tax-free, does not by itself justify cutting down the statutory relief, unless the facts truly permit segregation of the quantity used for different purposes. On that basis, the Court found the refusal of full rebate and the adoption of pro rata relief to be unsustainable.

Conclusion: The petitioner's claim could not be denied merely because a tax-free by-product was also produced, and the impugned order was liable to be quashed with the appeals remitted for fresh decision by a speaking order.

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