Gujarat HC Upholds Maize Products’ Proportionate CENVAT Credit Without Separate Input Accounts, Rejecting ₹5.84-Crore Demand Over Exempt By-Products

The respondent manufactured dutiable goods and exempted by-products using common inputs, including hydrochloric acid, caustic soda lye and furnace oil.

It claimed CENVAT credit proportionate to the inputs attributable to dutiable products.

The Revenue alleged that the respondent had not maintained separate accounts as required by Rule 6 and demanded 10% of the value of the exempted goods, with interest and penalty.

The adjudicating authority confirmed the demand of ₹5,84,59,071 and imposed a penalty; the CESTAT allowed the respondent’s appeal, holding that proportionate credit on dutiable products amounted to not taking credit on the exempted by-products.

The Revenue appealed under Section 35G of the Central Excise Act, 1944

Rule 6 of the CENVAT Credit Rules, 2004 governs credit on inputs used in dutiable and exempted goods: Rule 6(1) disallows credit on inputs used in exempted goods, Rule 6(2) requires separate accounts where common inputs are used, and Rule 6(3)(b) prescribes payment of an amount equal to 10% of the price of exempted goods where separate accounts are not maintained.

The Court applied *Sterling Gelatin*, which held that where the entire input is used to manufacture a dutiable final product and an exempted by-product emerges in the process, Rule 6 does not require separate accounts or payment on the by-product; it also held that taking credit only for inputs attributable to dutiable goods avoids the application of Rule 6(2).

The Court also relied on the by-product principles discussed in *Union of India v. Hindustan Zinc Ltd.* and the Gujarat High Court’s decision in *Hindalco Industries Ltd.*

The Court considered the respondent’s proportionate-credit method in light of the rule that Rule 6 is not attracted merely because an exempted by-product emerges from the manufacturing process.

It concluded that the respondent had taken credit only in proportion to the dutiable products, and that the exempted by-products could not, on the facts and settled authorities, be treated as products for which the common inputs were separately used.

Accordingly, the absence of separate accounts did not justify the 10% demand under Rule 6(3)(b).

Although the CESTAT had given brief reasons, the Court declined to remand the matter because the result accorded with the subsequent decisions of the Supreme Court and the Gujarat High Court

The Revenue’s appeal was dismissed