CENVAT credit on inputs used in defective goods remains admissible where those inputs were used in manufacture.

CENVAT credit remains admissible on inputs used in manufacture even where the finished dry cell batteries are defective, treated as waste, and cleared without payment of duty. The Tribunal applied the settled principle that credit cannot be denied merely because the final product is defective or waste, so long as the inputs were received and used in or in relation to manufacture, directly or indirectly. It also noted the departmental instruction recognising credit for inputs contained in waste, refuse, or by-products. On that basis, the demand was held unsustainable and the adverse orders were set aside.

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Issues: Whether CENVAT credit is recoverable on inputs used in the manufacture of defective dry cell batteries that were cleared without payment of duty.

Analysis: The dispute turned on whether inputs which were admittedly received and used in manufacture could be denied credit merely because the finished goods turned out to be defective or waste and were cleared without duty. The Tribunal noted the continuing departmental instruction that credit is admissible where inputs are contained in waste, refuse or by-product, and relied on the settled position that credit cannot be denied when the inputs are used in or in relation to manufacture, directly or indirectly. On that basis, the demand raised in both show cause notices was held to be unsustainable.

Conclusion: CENVAT credit was held to be admissible, and the demands, orders-in-original, and orders-in-appeal were set aside in favour of the assessee.

Ratio Decidendi: CENVAT credit cannot be denied on inputs merely because the manufactured final product is defective or becomes waste, where the inputs were used in the course of manufacture and the law or departmental instruction recognises credit for inputs contained in waste or refuse.

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