By-product treatment for spent acid preserves Cenvat credit and excludes Rule 6 demand on exempt clearances.

Spent Sulphuric Acid arising inevitably in the manufacture of LABSA was treated as a by-product, so Cenvat credit remained admissible on inputs contained in it. Existing precedent and the CBEC Manual were noted as recognising credit on input attributable to waste, refuse or by-product, and as not denying credit merely because the by-product is exempt. On that basis, Rule 6(3)(b) of the Cenvat Credit Rules, 2004 was considered inapplicable to the exempt clearances of Spent Acid, and the demand of 10% of value was unsustainable. The assessee's appeals succeeded and the Revenue's appeal failed.

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Issues: Whether Spent Sulphuric Acid arising unavoidably during manufacture of LABSA was a by-product so as to permit Cenvat credit on inputs contained therein and to exclude application of Rule 6(3)(b) of the Cenvat Credit Rules, 2004 on its exempt clearances.

Analysis: Spent Acid arose unintentionally and inevitably in the course of manufacture of the principal final product, LABSA, and was therefore a by-product by its very nature. The issue of credit eligibility on input contained in by-product or waste had already been settled by judicial precedent. The administrative guidance in Chapter 5, para 3.7 of the CBEC Manual of Supplementary Instructions also recognised that Cenvat credit is admissible on the input contained in waste, refuse or by-product, and that credit is not to be denied merely because an intermediate or by-product is exempt. The position was treated as consistent with the principle reflected in Rule 57D of the erstwhile Central Excise Rules, 1944.

Conclusion: Rule 6(3)(b) of the Cenvat Credit Rules, 2004 was held inapplicable to the exempt clearances of Spent Acid, and the demand of 10% of value was not sustainable.

Final Conclusion: The assessee's appeals succeeded and the Revenue's appeal failed, as the exempt clearance of the by-product did not attract the disputed demand.

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