Separate accounts under Cenvat Credit rules cannot be demanded for an unavoidable by-product arising incidentally in dutiable manufacture.

Rule 6(2) and Rule 6(3) of the Cenvat Credit Rules, 2004 were treated as inapplicable where bagasse emerged only as an inevitable and unavoidable by-product in the manufacture of dutiable sugar. The separate accounts obligation was confined to cases involving conscious use of common inputs for dutiable and exempted final products, and it could not be extended to an item not produced by choice. Applying the principle that the law does not compel an impossible obligation, CESTAT found no prima facie basis to insist on pre-deposit of the demand, interest and penalty, and granted waiver of pre-deposit with stay of recovery.

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Issues: Whether Rule 6(2) and Rule 6(3) of the Cenvat Credit Rules, 2004 apply where bagasse emerges as an inevitable and unavoidable waste/by-product in the manufacture of dutiable sugar, so as to justify insistence on pre-deposit of the demand, interest and penalty.

Analysis: Bagasse arose as an unavoidable by-product in the manufacture of sugar from sugarcane. The requirement of maintaining separate accounts and inventory under Rule 6(2) operates where a manufacturer consciously uses common inputs for both dutiable and exempted final products. That requirement cannot be extended to a situation where an unavoidable waste or by-product arises incidentally during the manufacture of the dutiable product, because in such a case the manufacturer cannot, as a matter of fact, maintain separate accounts for an item not produced by choice. The principle that the law does not compel performance of an impossible obligation was applied to the tax context.

Conclusion: Rule 6(2) and Rule 6(3) were held inapplicable on the facts at the prima facie stage, and the appellant was held entitled to waiver of pre-deposit and stay of recovery.

Ratio Decidendi: The obligation to maintain separate accounts under Rule 6 cannot be enforced where the exempted item is only an inevitable and unavoidable by-product or waste arising incidentally in the manufacture of the dutiable final product.

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