Rule 57D protects Modvat credit where input-containing residue inevitably arises in manufacture, even if later used for exempt output.

Rule 57D protected Modvat credit on sulphuric acid because the kettle residue containing part of the input inevitably arose in the manufacture of methyl methacrylate monomer and was not a product the assessee set out to make. Its later use in manufacturing exempt ammonium sulphate did not alter its character as waste, refuse or by-product for credit purposes. Credit could therefore not be denied merely because the residue containing input material was subsequently diverted to an exempt use.

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Issues: Whether Modvat credit on sulphuric acid could be denied on the ground that the kettle residue containing part of the acid was later used in the manufacture of exempted ammonium sulphate, and whether such residue was an intermediate product outside the protection of Rule 57D.

Analysis: Rule 57D protects credit where part of the input is contained in waste, refuse or by-product arising in the course of manufacture, and also where an intermediate product comes into existence during manufacture of the final product and such intermediate product is exempt. The decisive factor was the nature of the kettle residue in the appellant's manufacturing process. The residue emerged inevitably during the manufacture of methyl methacrylate monomer and was not something the appellant set out to manufacture. Its later transfer and use for making ammonium sulphate did not change its character for the purpose of credit eligibility. The situation was treated as analogous to the earlier principle that credit cannot be denied merely because a substance inevitably arises during manufacture and contains part of the input.

Conclusion: The kettle residue was covered by Rule 57D as waste, refuse or by-product arising in manufacture, and Modvat credit could not be denied on the quantity of sulphuric acid contained in it.

Ratio Decidendi: Credit under Rule 57D cannot be denied where part of an input inevitably emerges in the course of manufacture as waste, refuse or by-product, merely because that residue is subsequently used in making an exempt product.

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