Input credit protection for waste arising from dutiable manufacture cannot be denied merely because the waste is later processed into an exempt product.

Rule 57CC of the Central Excise Rules, 1944 could not be invoked to require reversal of common input credit where the inputs were used in the manufacture of dutiable gelatin and the mother liquor emerged only as waste. Rule 57D protected the credit because the waste arising from dutiable manufacture was not itself the exempt final product at the time of clearance. The later processing of that waste into an exempt product did not change the character of the original clearance, so the presumptive amount under Rule 57CC was not payable and the demand was set aside.

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Issues: Whether the demand and confirmation of amount under Rule 57CC of the Central Excise Rules, 1944 was sustainable where common input credit had been taken for manufacture of dutiable gelatin and the waste mother liquor later yielded exempted product.

Analysis: Rule 57D of the Central Excise Rules, 1944 protects credit of duty paid on inputs used in the manufacture of a dutiable final product even when waste arising in that process is cleared without duty. On the facts, mother liquor was only waste arising from manufacture of gelatin and not an exempted final product at the stage of clearance. The obligation to pay the presumptive amount under Rule 57CC arises only where inputs are used in the manufacture of exempted final products and separate accounts are not maintained. Since the waste mother liquor itself was not the exempted final product, Rule 57CC could not be invoked merely because that waste was subsequently processed into an exempt product.

Conclusion: The demand under Rule 57CC was not sustainable and was set aside in favour of the assessee.

Final Conclusion: The appeal succeeded and the impugned demand was annulled on the footing that input credit could not be denied or subjected to reversal for waste mother liquor arising from dutiable manufacture.

Ratio Decidendi: Credit on inputs used in the manufacture of a dutiable final product cannot be denied or subjected to Rule 57CC merely because waste arising from that process is later used to make an exempt product, where the waste itself is not the exempt final product.

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