Input credit on by-products retained where exempt goods arose only as a manufacturing by-product, with recovery stayed pending appeal.

Input credit was held to be admissible where the inputs were used to manufacture gelatin and the exempted Di-calcium Phosphate emerged only as a by-product from spent acid. Rule 6(1) of the Cenvat Credit Rules, 2002 applies only when inputs are used in the manufacture of exempted goods, so the emergence of a by-product did not justify denial of credit. The Tribunal also relied on its earlier view and the Board circular stating that credit is not denied merely because waste, refuse or a by-product arises in the course of manufacture. On that basis, a strong prima facie case was found and recovery of duty and penalty was stayed pending appeal.

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Issues: Whether the applicants made out a prima facie case for waiver of pre-deposit and stay of recovery in respect of duty and penalty demand arising from the emergence of an exempted by-product during manufacture, and whether the input credit could be denied or varied on that basis.

Analysis: The inputs were used for manufacture of gelatin, not for manufacture of the exempted product directly. The exempted Di-calcium Phosphate arose only from the spent acid/by-product obtained in the course of gelatin manufacture. Rule 6(1) of the Cenvat Credit Rules, 2002 bars credit only where inputs are used in the manufacture of exempted goods, and the absence of Rule 57D in the Cenvat Credit Rules did not justify treating the by-product as the main product. The Tribunal also relied on the earlier view that credit cannot be denied merely because a by-product emerges, and noted the Board's circular clarifying admissibility of credit in respect of input contained in waste, refuse or by-product.

Conclusion: The applicants established a strong prima facie case. Recovery of the duty demand and penalty was stayed during pendency of the appeal, in favour of the assessee.

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