Cenvat credit scrap clearance principle: duty applies to scrap generated in manufacture, not to inputs cleared as such.

Rule 3(4) of the Cenvat Credit Rules, 2002 did not apply to scrap generated during manufacture, because the cleared material was damaged copper tubes no longer in its original input form. Clearance of inputs as such was therefore not the correct basis for duty; any duty was payable only on the scrap itself. Since the demand proceeded on the wrong premise, the associated penalty was also unsustainable. The demand and penalty were set aside, and the matter was remitted to the original authority to determine any duty payable on the scrap and adjust the deposit accordingly.

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Issues: Whether Rule 3(4) of the Cenvat Credit Rules, 2002 applied to scrap generated during manufacture from inputs, and whether duty reversal and penalty were payable on such clearance.

Analysis: The cleared material was described as damaged copper tubes and was no longer the input received in its original form. The provision governing clearance of inputs as such therefore did not apply to scrap generated in the course of manufacture. Duty, if any, was payable only on the scrap and not by treating it as clearance of copper tubes. As the demand proceeded on the wrong premise, the penalty also lacked justification.

Conclusion: The demand of duty and the penalty were set aside, and the matter was remitted to the original authority to determine any duty payable on the scrap and adjust the deposit accordingly.

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