Input credit remains available when manufacture yields exempt by-product or waste, despite nil-rated final goods clearance

Credit of duty on inputs remained admissible under the Modvat/Cenvat scheme even though the final product was cleared at nil rate of duty, because Rule 57C could not be used to deny credit in these circumstances. The Court treated the disputed item as a by-product or waste arising during manufacture and applied Rule 57D, which protects input credit where such by-product, refuse or waste is exempt or chargeable to nil duty. The fact that part of the by-product was cleared on payment of duty and part under Chapter X procedure reinforced the position that credit was not barred. The Revenue's challenge therefore failed.

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Issues: Whether credit of duty on inputs is admissible when the final product is cleared at nil rate of duty and the disputed item emerges as a by-product or waste during manufacture.

Analysis: The appeal turned on the applicability of the Modvat/Cenvat scheme to inputs used in the manufacture of goods cleared at nil rate, and on whether Rule 57C could be invoked to deny credit. The Court applied the settled position that the disputed product was not the final product and that, even if treated as waste, refuse or by-product, Rule 57D protected credit where such by-product was either exempt or chargeable to nil duty. The Court also noted that part of the by-product was cleared on payment of duty and part under Chapter X procedure pursuant to the relevant notifications.

Conclusion: Credit of duty on inputs was admissible and the Revenue's challenge failed.

Ratio Decidendi: Credit on inputs cannot be denied merely because the final product is cleared at nil rate of duty, and Rule 57D protects such credit where the emergence of waste, refuse or by-product occurs in manufacture.

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