Cenvat credit on incidental scrap by-product cannot be denied when inputs are used in an integrated manufacturing process.

Rule 6(3)(b) of the Cenvat Credit Rules, 2004 was treated as inapplicable where exempt scrap emerged only incidentally during an integrated manufacturing process for dutiable final goods made from the same inputs. The reasoning was that the entire stainless steel flats were consumed in producing dutiable SS cold rolled patta/patti, with no material showing exclusive use of any input for scrap. Because the scrap was only a by-product and not a separate final product arising from divisible input consumption, credit could not be denied on a notional attribution and separate maintenance of accounts was not required. Demand, interest, and penalties based on that provision were therefore unsustainable.

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Issues: Whether Rule 6(3)(b) of the Cenvat Credit Rules, 2004 applied so as to require reversal or payment on the ground that exempt scrap/by-product emerged incidentally in the course of manufacture of dutiable final products from the same inputs.

Analysis: The entire SS flats were used in an integrated manufacturing process for production of dutiable SS cold rolled patta/patti. No part of the inputs was shown to have been exclusively used for manufacture of scrap. The scrap arose only incidentally as a by-product during the process, and the situation was not one of two distinct final products made from separable input consumption. In such circumstances, credit cannot be denied on a notional attribution of inputs to the exempt by-product, and the requirement of maintaining separate accounts does not arise on these facts.

Conclusion: Rule 6(3)(b) was held inapplicable, and the demand, interest, and penalties founded on that provision could not be sustained.

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