By-product treatment under Modvat: lean gas from LPG manufacture attracted Rule 57D and defeated the Rule 57CC demand.

Lean gas arising during extraction of LPG from natural gas was treated as a by-product, with LPG remaining the main product. On that footing, the Tribunal applied the Modvat principle that credit is not denied merely because part of the inputs is contained in waste, refuse, or a by-product generated in manufacture. As the facts matched an earlier decision on the same issue, Rule 57D applied and the demand under Rule 57CC could not be sustained. The assessees were therefore entitled to the benefit flowing from by-product treatment of lean gas under the Modvat scheme.

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Issues: Whether lean gas arising in the process of extracting LPG from natural gas was a by-product so as to attract Rule 57D and exclude liability under Rule 57CC.

Analysis: The dispute turned on the character of lean gas in the manufacturing scheme. The record showed that LPG was treated as the main product and lean gas as the by-product, including in the assessee's excise registration and in the departmental notice itself. The Tribunal applied the principle that, for Modvat purposes, credit is not to be denied merely because part of the inputs is contained in a waste, refuse, or by-product arising during manufacture. Since the assessee's case was that lean gas emerged incidentally in the process of producing LPG, and the facts matched an earlier decision on an identical issue, the demand under Rule 57CC could not stand once lean gas was accepted as a by-product.

Conclusion: Lean gas was a by-product, Rule 57D applied, and the demand raised under Rule 57CC was not sustainable.

Final Conclusion: The appeals succeeded and the assessees were entitled to the benefit flowing from the by-product treatment of lean gas under the Modvat scheme.

Ratio Decidendi: Where goods arise incidentally as a by-product in the manufacture of the intended final product, Modvat credit cannot be denied on the ground of the by-product's clearance, and a demand under Rule 57CC fails if Rule 57D is attracted.

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