Incidental by-product clearances do not trigger exempted-product reversal when the item is not a separate final product.

An incidental by-product arising during the manufacture of oxygen and nitrogen, such as carbon dioxide free air cleared as "Zero Air", is not treated as a separate final product merely because it is occasionally compressed and sold. Rule 57CC applies only where a manufacturer produces two final products, one dutiable and one exempted; where the item is only a by-product, reversal or recovery under that rule is not attracted. The commentary also notes that where clearances are made on record and known to the revenue, the extended limitation period cannot be invoked for a demand covering earlier years.

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Issues: (i) whether the clearance of "Zero Air" arising incidentally during manufacture could be treated as a separate final product so as to attract reversal or recovery under Rule 57CC of the Central Excise Rules, 1944; (ii) whether the demand was barred by limitation.

Issue (i): whether the clearance of "Zero Air" arising incidentally during manufacture could be treated as a separate final product so as to attract reversal or recovery under Rule 57CC of the Central Excise Rules, 1944

Analysis: The appellants were primarily manufacturing oxygen and nitrogen, and the carbon dioxide free air arose only as a consequence of the manufacturing process. Its occasional compression and sale as "Zero Air" depended upon customer availability and did not show that it was manufactured as a regular final product. Rule 57D protected credit where part of the inputs was contained in waste, refuse or by-product arising in manufacture, and Rule 57CC applied where a manufacturer was engaged in the manufacture of two final products, one dutiable and the other exempted. On the facts, "Zero Air" was only a by-product and the conditions for invoking Rule 57CC were not satisfied.

Conclusion: The demand under Rule 57CC was not sustainable against the assessee.

Issue (ii): whether the demand was barred by limitation

Analysis: The show cause notice was issued after the normal period for a demand covering clearances over several years. The clearances of "Zero Air" were made on documents and were available to the revenue, so the extended period could not be justified on the facts recorded.

Conclusion: The demand was barred by limitation.

Final Conclusion: The impugned order was set aside and the appeal was allowed with consequential relief.

Ratio Decidendi: An incidental by-product arising during manufacture does not become a separate final product merely because it is occasionally cleared for sale, and the special reversal provision for manufacture of exempted and dutiable final products cannot be invoked where the clearances are of such by-product and are within the revenue's knowledge.

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