CENVAT credit on cotton inputs upheld where waste arose as a by-product in fabric manufacture, with no reversal required.

CENVAT credit on cotton inputs remained admissible where cotton waste arose only as a by-product during manufacture of cotton fabrics, because the inputs were used in or in relation to the manufacture of the final product. The Board circular was applied to confirm that credit cannot be denied merely because waste, refuse, or a by-product emerges in the manufacturing process. On that basis, reversal of credit was not required and the impugned order was held unsustainable, with consequential relief following.

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Issues: Whether CENVAT credit on cotton inputs was admissible when cotton waste arose as a by-product during manufacture of cotton fabrics, and whether reversal of such credit was required.

Analysis: The Board circular clarified that CENVAT credit is admissible on the portion of inputs contained in waste, refuse or by-product, and that credit cannot be denied so long as the inputs are used in or in relation to manufacture of final products. Cotton waste arose only during the manufacture of cotton fabrics and was treated as a by-product, not the final product. The view was consistent with the Tribunal decision relied upon in support of admissibility.

Conclusion: The credit was admissible and no reversal was required.

Final Conclusion: The impugned order was unsustainable and the appeal succeeded with consequential relief.

Ratio Decidendi: CENVAT credit cannot be denied on inputs merely because a waste or by-product emerges during manufacture, if the inputs are otherwise used in or in relation to the manufacture of the final product.

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