Cenvat Credit on unavoidable by-products: separate input accounts not required where compliance is impossible

Rule 6(3)(b) of the Cenvat Credit Rules, 2002/2004 was treated as inapplicable where exempt goods arose only as inevitable by-products in the manufacture of dutiable final products and separate maintenance of accounts for common inputs was impracticable. The principle that the law does not require impossible compliance was applied, so the inability to identify and segregate inputs used for exempt and dutiable goods did not trigger reversal or payment under Rule 6(2) read with Rule 6(3)(b). The same reasoning was stated to extend to the earlier Rule 57CC, and the consequent demands, interest and penalties could not be sustained.

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Issues: Whether Rule 6(3)(b) of the Cenvat Credit Rules, 2002/2004 could be invoked where exempt goods emerged only as inevitable by-products in the manufacture of dutiable final products, and separate maintenance of accounts and inventory for common inputs was impossible.

Analysis: The dutiable final products were manufactured with common inputs on which credit had been taken, and the exempt goods arose incidentally as unavoidable by-products. In such a situation, separate identification and inventory of inputs used for dutiable and exempt products could not realistically be maintained. The principle that the law does not compel a person to do the impossible was applied. The provisions of Rule 6(2) read with Rule 6(3)(b) of the Cenvat Credit Rules, 2002/2004, and the earlier Rule 57CC of the Central Excise Rules, 1944, were held inapplicable in such cases.

Conclusion: Rule 6(3)(b) was not attracted, and the demands, interest and penalties could not be sustained. The appeals by the Revenue were dismissed.

Ratio Decidendi: Where exempt goods emerge only as inevitable by-products in the course of manufacture of dutiable final products, the requirement to maintain separate accounts for common inputs cannot be enforced if compliance is impossible, and Rule 6(3)(b) does not apply.

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