Modvat credit on input used for dutiable manufacture not denied merely because a by-product became exempt Sulphuric Acid.

Modvat credit on LDO used in smelting for manufacture of zinc and lead could not be denied merely because Sulphur Di-oxide arose as a by-product and was later converted into exempt Sulphuric Acid. Rule 57D(1) protected the credit where the input was used in the dutiable principal manufacture and the exempt product was not manufactured from that input in the sense required by Rule 57C. The conscious routing of the by-product to a Sulphuric Acid plant did not establish use of LDO in the exempt product, so proportionate reversal was not warranted.

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Issues: Whether Modvat credit on LDO was deniable on the ground that part of the output stream was used to produce exempted Sulphuric Acid.

Analysis: The credit was availed on LDO used in the smelting operations for manufacture of zinc and lead, while Sulphur Di-oxide emerged as a by-product in that process and was subsequently converted into Sulphuric Acid. Rule 57D(1) of the Central Excise Rules, 1944, protected credit from being denied merely because part of the inputs was contained in a by-product, even if the by-product was exempt. The fact that Sulphur Di-oxide was consciously routed to the Sulphuric Acid Plant did not establish that LDO itself was used in the manufacture of the exempt product. Rule 57C was therefore not attracted, because the inputs were not used in the manufacture of the exempted Sulphuric Acid in the sense required by that rule.

Conclusion: Modvat credit could not be denied or proportionately reversed on the ground that Sulphuric Acid, obtained from the by-product stream, was exempt from duty.

Ratio Decidendi: Credit on inputs used in the manufacture of the principal dutiable product cannot be denied merely because a by-product arising in that process is further converted into an exempt product, where the input itself is not used in the manufacture of the exempt product and Rule 57D(1) protects credit in respect of by-products.

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