Unavoidable by-products and Cenvat credit: nil-rated clearances do not trigger reversal where inputs are shared with dutiable output.

Unavoidable by-products arising during manufacture of dutiable final products do not justify denial or reversal of Cenvat credit merely because they clear at nil rate of duty. Reading Rule 57D of the Central Excise Rules, 1944 with the CBEC Manual, the presence of common inputs in waste, refuse, or by-products does not trigger payment obligations meant for exempted final products. Applying the Supreme Court's reasoning in Hindustan Zinc Ltd. and related authority, the demand under Rule 6(2) and Rule 6(3)(b) of the Cenvat Credit Rules, 2002/2004 was held unsustainable and was set aside.

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Issues: Whether the demand of 8% of the value of by-products cleared at nil rate of duty was sustainable where such by-products arose unavoidably during manufacture of dutiable final products.

Analysis: The products in question were found to arise unavoidably as by-products during the manufacture of the dutiable final products. On a combined reading of Rule 57D of the Central Excise Rules, 1944 and the CBEC Manual, credit is not to be denied or varied merely because part of the inputs is contained in waste, refuse or by-products, even if such by-products are exempt or chargeable to nil rate of duty. The reasoning of the Supreme Court in Hindustan Zinc Ltd. and the earlier line of authority was applied to hold that the presence of common inputs in such by-products does not attract the reversal or payment requirement under the rule framed for exempted final products.

Conclusion: The demand raised under Rule 6(2) and Rule 6(3)(b) of the Cenvat Credit Rules, 2002/2004 was not sustainable and was set aside in favour of the assessee.

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