Cenvat reversal on sugar by-products rejected: waste and residue from manufacture were not treated as exempted goods.

5% reversal under Rule 6 of the Cenvat Credit Rules, 2002 was held inapplicable to bagasse, press-mud and bio-compost arising incidentally during manufacture of sugar, because they were not independently manufactured final products. The demand rested on a departmental circular dated 28.10.2009, but the circular had already been quashed by the Allahabad High Court. The governing principle stated that waste or residue emerging inevitably in the course of manufacture does not become exempted goods merely because it is marketable, and common inputs used for the dutiable final product do not by themselves justify reversal on such by-products. The 5% reversal demand was therefore not sustainable and the appeals were allowed.

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Issues: Whether 5% reversal was payable under Rule 6 of the Cenvat Credit Rules, 2002 on bagasse, press-mud and bio-compost arising during manufacture of sugar, on the footing that they were exempted goods manufactured with common inputs and input services.

Analysis: The clearance of bagasse, press-mud and bio-compost arose incidentally during the manufacture of VP sugar and they were not shown to be independently manufactured final products. The demand was founded on the departmental circular dated 28.10.2009, which had already been quashed by the Allahabad High Court. The reasoning in the binding judicial pronouncements was that waste emerging inevitably in the course of manufacture does not become exempted goods merely because it is marketable, and the use of common inputs for the dutiable final product does not by itself justify reversal on the waste that emerges as a by-product or residue.

Conclusion: The 5% reversal demand was not sustainable and the appeals were allowed.

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