Cenvat credit on pollution control equipment and unavoidable steam by-product does not trigger Rule 6 reversal

Cenvat credit was held admissible on a waste heat recovery boiler and its parts used as pollution control equipment because the goods were integrally connected with the manufacturing process under the user test. The note also states that steam incidentally generated during manufacture was an inevitable by-product, not a deliberately manufactured exempted product, so no 10% reversal of credit was required under Rule 6. The stated effect is that such pollution control equipment qualifies as capital goods for credit purposes, and unavoidable secondary outputs do not trigger exempted goods treatment when they arise technologically as part of the production process.

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Issues: (i) Whether Cenvat credit was admissible on waste heat recovery boiler and its parts used as pollution control equipment; (ii) Whether the assessee was liable to reverse 10% of the credit on the ground that steam generated during manufacture was an exempted product.

Issue (i): Whether Cenvat credit was admissible on waste heat recovery boiler and its parts used as pollution control equipment.

Analysis: The equipment was installed to cool hot flue gases as part of the pollution control process, and the legal test applied was whether the goods were used in an activity integrally connected with manufacture. The established user test treats equipment mandated for pollution control as eligible capital goods when it serves the manufacturing process and is not a mere unrelated accessory.

Conclusion: Cenvat credit on the pollution control equipment was admissible, in favour of the assessee.

Issue (ii): Whether the assessee was liable to reverse 10% of the credit on the ground that steam generated during manufacture was an exempted product.

Analysis: Steam emerged incidentally in the course of manufacture and was not a product deliberately manufactured by using common inputs for a separate exempted output. The governing principle is that a by-product or inevitable process output does not attract the requirement of treating it as exempted goods for the purpose of Rule 6 where the entire inputs are used in the manufacture of the dutiable final product and the emergence of the secondary output is technologically unavoidable.

Conclusion: No reversal of 10% credit was required, in favour of the assessee.

Final Conclusion: The impugned order was unsustainable and was set aside, resulting in acceptance of the assessee's claim for consequential relief.

Ratio Decidendi: An inevitable by-product generated during manufacture does not become exempted goods for Rule 6 purposes, and pollution control equipment integrally used in the manufacturing process qualifies for Cenvat credit under the user test.

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