Cenvat credit on intermediate products cannot be denied for in-house manufacture once attributable reversal for diverted quantity is made.

Credit on minor oil used to make fatty acid was not to be denied merely because part of the fatty acid was returned to a third party under contract, where credit attributable to that quantity had already been reversed. The disputed credit related only to oil used for fatty acid that was subsequently consumed within the assessee's own factory in soap manufacture. As fatty acid functioned only as an intermediate product in that production stream, denial based on exemption attached to the portion supplied out could not extend to the remaining quantity used in dutiable manufacture. The prior taking of credit on the full quantity did not alter this position once the attributable reversal had been made.

---

---

Issues: Whether credit on minor oil used in the manufacture of fatty acid was deniable merely because a part of the fatty acid was returned to a third party under contract, when credit had already been reversed proportionately for that quantity and the remaining fatty acid was used in the assessee's own manufacture of soap.

Analysis: The credit was not claimed for the oil used in producing fatty acid returned to the third party, and the reversal of credit on that quantity was not disputed. The disputed portion related to oil used to produce fatty acid that was subsequently consumed in the assessee's own factory for soap manufacture. In that production stream, fatty acid was only an intermediate product and not the final product. Denial of credit on the footing that the fatty acid supplied out of part of the production was exempt could not extend to the portion of oil used in the assessee's own manufacture. The fact that credit had initially been taken on the entire quantity did not alter the position, since the objection was not pursued as a penal issue and the credit had already been reversed to the extent attributable to the quantity returned.

Conclusion: Credit could not be denied on the quantity of oil used to manufacture fatty acid that was consumed in the assessee's own factory for soap manufacture; the assessee succeeded on this issue.

Final Conclusion: The denial of credit was unsustainable, and the order confirming such denial was set aside with consequential relief.

Ratio Decidendi: Where a product generated in the course of manufacture is only an intermediate product and the credit attributable to the quantity diverted to an exempt or returned product has already been reversed, credit cannot be denied on the remaining quantity used in the assessee's own dutiable manufacture merely because part of the same process involved supply to another party.

---