Concessional duty cannot be denied absent evidence of credit on inputs used exclusively for by-product manufacture.

M/s. Nitta Gelatin India Ltd. manufactured gelatin using inputs including hydrochloric acid, furnace oil and acetic acid, and availed CENVAT credit on inputs, input services and capital goods.

Sludge arose as an inevitable waste/by-product during the manufacture of gelatin. The sludge was subsequently treated with acetic acid, hot water and caustic soda to produce a fertilizer called “Nutri Gold,” classified under tariff heading 3105 5900.

Nutri Gold was initially cleared under the exemption granted by Notification No. 4/2006-CE and, after withdrawal of that exemption, was cleared at the concessional rate of 1% under Notification No. 1/2011-CE and, subsequently, Notification No. 12/2011-CE.

The Department alleged that, since the appellant had availed CENVAT credit, it was ineligible for the concessional rate and was liable to pay duty at the higher applicable rate, along with penalties.

The adjudicating authority confirmed the demand, holding that certain inputs, including acetic acid, caustic soda and HDPE bottles, were used exclusively in manufacturing Nutri Gold; the Commissioner (Appeals) upheld that order.

The appellant challenged the orders in the three appeals.

1. Whether the appellant was disentitled to the concessional rate under Notifications Nos. 1/2011-CE and 12/2011-CE merely because it had availed CENVAT credit on inputs and input services used in the manufacture of gelatin, when Nutri Gold emerged from sludge generated as a by-product or waste of that process.

2. Whether the Department established that CENVAT credit had been availed on inputs or input services purchased and used exclusively for the manufacture of Nutri Gold, so as to attract the exclusionary condition in the notifications.

3. Whether the demands and penalties could be sustained in the absence of specific allegations and evidence identifying the allegedly ineligible inputs.

The Tribunal applied the conditional exemption/concessional-rate provisions of Notifications Nos. 1/2011-CE and 12/2011-CE, under which the benefit was unavailable where credit had been taken on inputs or input services used in the manufacture of the notified goods.

It also applied the CENVAT credit principles embodied in Rules 3, 6 and 13 of the CENVAT Credit Rules, 2004, and the distinction between a final product and a by-product or waste arising necessarily during manufacture.

Relying on Union of India v. Hindustan Zinc Ltd., 2014 (303) E.L.T. 321 (S.C.), including its reliance on CCE v. Gas Authority of India Ltd., 2008 (232) E.L.T. 7 (S.C.), the Tribunal held that common inputs used in manufacturing the principal final product do not, merely because a by-product or waste is subsequently processed or cleared, establish that credit was taken on inputs used for manufacturing a separate final product.

The Department bears the burden of demonstrating that credit was availed on inputs exclusively used in the manufacture of the exempted or concessional goods.

The show-cause notice did not identify the particular inputs on which CENVAT credit was allegedly availed for manufacturing Nutri Gold.

Although the original authority stated that some inputs—such as acetic acid, caustic soda and HDPE bottles—were exclusively connected with Nutri Gold, the order did not establish this finding with specific evidence; moreover, HDPE bottles were introduced only in the adjudication order and had not been referred to in the show-cause notice.

The Tribunal found that the record instead indicated that sludge first arose as an inevitable by-product of gelatin manufacture and was only thereafter processed into Nutri Gold.

In accordance with Hindustan Zinc, the emergence or subsequent processing of a by-product could not be equated with the manufacture of an independent final product for purposes of denying credit on common inputs.

Since the Department failed to prove that inputs or input services were purchased and used exclusively for Nutri Gold, the condition denying the concessional notification benefit was not attracted.

The impugned orders confirming the differential duty and penalties were set aside, and all three appeals were allowed.