Common inputs test limits Rule 6 demands; by-products and unavoidable waste fall outside the Cenvat credit reversal scheme.

Rule 6(2) and Rule 6(3) of the Cenvat Credit Rules, 2004 apply only where common inputs or input services on which credit has been taken are used for both dutiable and exempted final products and separate accounts are not maintained. The text states that the notices did not identify any such common inputs or input services for iron ore fines and coal fines, and that the provisions do not extend to exempted goods arising as unavoidable waste or by-products. On that basis, invocation of Rule 6(3), together with the demand and penalty, was unsustainable, and the orders setting aside the demands were affirmed.

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Issues: Whether Rule 6(2) and Rule 6(3) of the Cenvat Credit Rules, 2004 could be invoked to demand an amount equal to 10% of the sale value of iron ore fines and coal fines cleared from the factory as exempted goods.

Analysis: Rule 6(2) and Rule 6(3) apply only where common inputs or input services on which Cenvat credit has been taken are used in the manufacture of both dutiable and exempted final products and separate accounts and inventories are not maintained. The show cause notices did not specify the common inputs or input services on which credit had been taken and which were used for both categories of final products. The provisions also do not apply to exempted goods that emerge as inevitable and unavoidable waste or by-products, because separate account and inventory cannot be maintained in such a situation. The same view was supported by the principle that the pari materia provision does not apply to by-products.

Conclusion: Rule 6(3) could not be invoked and the demand and penalty were unsustainable.

Final Conclusion: The appeals failed and the orders setting aside the demands were affirmed.

Ratio Decidendi: Rule 6(2) and Rule 6(3) of the Cenvat Credit Rules, 2004 apply only when identifiable common inputs or input services used for both dutiable and exempted final products are shown, and they do not extend to by-products or unavoidable waste.

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