Exempt by-product classification does not trigger Rule 6 liability where the item emerges incidentally in manufacture.

An exempt by-product arising incidentally during manufacture does not become a final product for Rule 6 of the Cenvat Credit Rules, 2004 merely because it is separately classifiable in the tariff and exempt by notification. The Revenue had itself treated tobacco refuse as a by-product, and its tariff entry did not alter that character. As a result, the demand to pay 10% of its value under Rule 6 was not sustainable, the assessee was not liable for that amount, and the impugned order was set aside with consequential relief.

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Issues: Whether the exempt by-product "tobacco refuse" emerging during manufacture of cigarettes and cut tobacco could be treated as a final product for the purpose of Rule 6 of the Cenvat Credit Rules, 2004, so as to require payment of 10% of its value.

Analysis: The Revenue itself had treated "tobacco refuse" as a by-product in the show cause notice and in the adjudication order. Its classification under the tariff and exemption by notification did not alter its character as a by-product arising incidentally in the course of manufacture of the appellants' final products. The distinction drawn by the appellate authority on the ground that the item was a specified tariff entry and exempted by notification was held not to be material. The legal position applied was that an exempt by-product does not cease to be a by-product merely because it is separately identifiable in the tariff and exempt from duty.

Conclusion: The demand under Rule 6 was not sustainable, and the assessee was not liable to pay 10% of the value of the exempt by-product.

Final Conclusion: The impugned order was set aside and the appeals were allowed with consequential relief.

Ratio Decidendi: An item that emerges incidentally as a by-product during manufacture does not become a final product for Rule 6 purposes merely because it is separately classified in the tariff and exempted from duty by notification.

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