Input credit reversal not attracted where soap stock is an incidental by-product and acid oil arises after further processing.

Common inputs used in the manufacture of dutiable refined oil and hydrogenated vanaspati did not trigger reversal merely because soap stock emerged as a waste or incidental by-product. Acid oil was obtained only after further processing of that soap stock, and the reversal mechanism could not be applied on the footing that such waste had later been converted into an exempt product. The stated principle is that input credit cannot be denied when a waste or incidental product emerges during manufacture of a dutiable final product, and subsequent processing of that waste into another product does not by itself attract the presumptive reversal obligation.

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Issues: Whether the assessee was required to reverse 8% of the value of acid oil cleared without payment of duty, on the footing that common inputs were used in the manufacture of dutiable and exempted goods.

Analysis: The soap stock generated during the manufacture of refined oil and hydrogenated vanaspati was held to be a waste or incidental emergence in the manufacturing process, not a product manufactured from the common inputs. Acid oil was produced only after further processing of that soap stock. Since the common inputs were used in the manufacture of the dutiable final products and the soap stock itself was not the final product attracting the reversal mechanism, the obligation to pay the presumptive 8% amount did not arise. The reasoning was supported by the settled principle that credit on inputs used for a dutiable final product cannot be denied merely because a waste or incidental product emerges, and further processing of such waste into an exempt product does not by itself attract the reversal provision.

Conclusion: The assessee was not liable to reverse 8% of the value of acid oil, and the demand on merits was unsustainable.

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