Cenvat credit on capital goods allowed where an integrated process produced an intermediate exempt product before the dutiable final product.

Cenvat credit on capital goods cannot be denied where the goods are used in a single integrated manufacturing process that necessarily produces an intermediate product before the dutiable final product emerges. Spirit first came into existence and was then denatured to produce the dutiable final product, so the process could not be artificially split to treat the capital goods as used only for a non-dutiable output. The fact that a major portion of the spirit was cleared without duty did not create a percentage-based restriction under the credit rules. Credit was therefore available in relation to the manufacture of the dutiable final product.

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Issues: Whether Cenvat credit on capital goods could be denied on the ground that the goods were used in the manufacture of spirit, when denatured spirit, the dutiable final product, came into existence only after the spirit was produced and a major portion of the spirit was cleared without duty.

Analysis: The dispute turned on whether the manufacturing process could be artificially split so as to treat the capital goods as used only for a non-dutiable product. The record showed that denatured spirit could not be manufactured unless spirit first came into existence, and the subsequent denaturing process was only a further step in the same manufacturing chain. The fact that a large part of the spirit was cleared as such and only a small portion was converted into denatured spirit did not create a percentage-based restriction under the credit rules. The Board's circular and the cited decisions supported the principle that credit is not denied where capital goods are used in the manufacture of intermediate exempt goods that are further used to produce a dutiable final product.

Conclusion: The capital goods were used in relation to the manufacture of the dutiable final product, denatured spirit, and Cenvat credit could not be denied. The issue is decided in favour of the assessee.

Ratio Decidendi: Where capital goods are used in a single integrated manufacturing process that necessarily produces an intermediate product used to obtain a dutiable final product, credit cannot be denied merely because the intermediate product is exempt or a large part of the output is cleared without duty.

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