Rule 6 liability does not extend to unintended by-products arising incidentally during manufacture and sold separately.

Carbon dioxide emerging incidentally during manufacture of denatured alcohol, and sold as a by-product, was not treated as an intended manufactured product. The percentage-based liability under Rule 6 was applied in light of the earlier rule governing exempted products, and the existing judicial view was followed to hold that such reversal or payment provisions do not extend to exempted or unintended by-products arising in the course of manufacture. On that basis, the demand under Rule 6 was held unsustainable and the assessee succeeded.

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Issues: Whether carbon dioxide emerging incidentally during manufacture of denatured alcohol, and sold as a by-product, attracted liability to pay 10% of its sale value under Rule 6.

Analysis: The carbon dioxide arose unintentionally in the course of manufacture of the final product and was not itself the intended manufactured product. The provision relied upon for recovery was treated as materially identical to the earlier rule governing exempted products, and the existing judicial view was applied to hold that such a percentage-based liability does not extend to exempted by-products or unintended by-products arising during manufacture.

Conclusion: The demand based on Rule 6 was not sustainable, and the issue was decided in favour of the assessee.

Ratio Decidendi: A percentage-based reversal or payment provision applicable to exempted final products does not apply to an unintended by-product that arises incidentally during manufacture.

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