Cenvat credit on inputs used for dutiable output and by-products cannot be denied by exempted-product reversal rules.

Duty-paid copper concentrate used wholly to manufacture dutiable copper anodes could not be treated as a common input for sulphuric and phosphoric acid manufactured later from sulphur-di-oxide and other chemicals. The scheme governing exempted final products applied to common inputs used in both dutiable and exempted final products, whereas this process involved a dutiable final product and by-products or intermediate products. Rule 57D continued to protect credit where part of the input was contained in a by-product arising during manufacture, and that protection was not displaced by Rule 57AD or Rule 6. Accordingly, proportionate reversal or an 8% demand was not sustainable, and the demand, interest and penalty were set aside.

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Issues: Whether copper concentrate could be treated as a common input for the dutiable copper anodes as well as the sulphuric acid and phosphoric acid cleared partly as exempted goods, and whether the demand of an amount equal to 8% of the price under Rule 57AD of the Central Excise Rules, 1944 and Rule 6 of the Cenvat Credit Rules was sustainable; whether Rule 57D of the Central Excise Rules, 1944 continued to protect credit in respect of inputs contained in a by-product.

Analysis: The final product manufactured from imported copper concentrate was copper anode, cleared on payment of duty. Sulphur-di-oxide emerged in the smelting process as a by-product, and the sulphuric acid and phosphoric acid were manufactured thereafter by using sulphur-di-oxide and other chemicals. Copper concentrate ceased to have its identity once copper anode was manufactured, and it could not be regarded as a common input for the later products. The provisions dealing with exempted final products proceeded on the basis of common inputs used in the manufacture of dutiable and exempted final products, whereas the present case involved a dutiable final product and by-products/intermediate products. Rule 57D protected credit where part of the input was contained in a by-product arising during manufacture, and that protection was not taken away by the later introduction of Rule 57AD or Rule 6.

Conclusion: The 8% demand was not sustainable, and the assessees' appeals succeeded while the Revenue's appeals failed.

Final Conclusion: The impugned demand, interest and penalty were set aside, and the assessee was held not liable to pay the amount demanded under the exemption-credit reversal provisions.

Ratio Decidendi: Credit cannot be denied or proportionate reversal demanded under the provisions governing exempted final products where the duty-paid input is used wholly in the manufacture of a dutiable final product and a by-product arises in the process, even if that by-product is further utilised to make other products.

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