Rule 6(1) and 6(2) not triggered when inputs fully used for dutiable goods, exempt by-products incidental

HC held that Rule 6(1) and 6(2) of the Cenvat Credit Rules were inapplicable where Hydrochloric Acid was entirely used in manufacturing dutiable Gelatin and Di-Calcium Phosphate emerged only as a by-product through inevitable Mother Liquor. Since no quantity of input was deliberately used to manufacture the exempted product, the assessee was not required to maintain separate accounts or pay 8%/10% of the value of exempted goods. The emergence of the by-product alone did not attract Rule 6, particularly as credit was taken only on inputs intended for dutiable goods. Finding no legal infirmity in the Tribunal's order, HC dismissed the revenue's appeal.

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Issues: Whether Rule 6 of the Cenvat Credit Rules, 2002 required reversal/payment in respect of an exempted product that emerged inevitably as a by-product during manufacture of the dutiable final product, when the input was used in the manufacture of the dutiable product and no separate quantity of input was deliberately used for the exempted product.

Analysis: The input hydrochloric acid was found to be used in the manufacture of gelatin, and the emergence of mother liquor was held to be inevitable in that process. The Court held that where the entire input is used for the dutiable product and the exempted product emerges only incidentally as a by-product or waste, Rule 6 does not get attracted merely because the by-product is later used to make an exempted product. In such circumstances, there is no requirement to maintain separate accounts for input attributable to the exempted product, and demanding an additional percentage on the value of the exempted product would amount to taxing the same input twice.

Conclusion: The Court held that Rule 6 was not applicable on the facts, and the demand, penalty, and interest were not sustainable.

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