Intermediate products used in further manufacture are not exempted final products under Rule 6.

The appellant manufactured sugar confectionery and “processed milk.”

The processed milk was either captively consumed in the manufacture of sugar confectionery or supplied to job workers for further manufacture; it was not cleared or sold as an independent product.

Since processed milk was exempt under Notification No. 03/2006-CE dated 1 March 2006, the Department treated it as an exempted final product and alleged that the appellant had used common input services for dutiable and exempted goods without maintaining separate accounts under Rule 6 of the CENVAT Credit Rules, 2004.

Show cause notices were issued for recovery of ₹4,17,126 for March 2013 and ₹6,60,643 for April 2013–March 2014, along with interest and penalties.

The demands were confirmed by the adjudicating authority and upheld by the Commissioner (Appeals), leading to the present appeals.

Whether processed milk, which arose during the integrated manufacture of sugar confectionery and was captively consumed or sent to job workers for further manufacture, constituted an “exempted final product” for purposes of Rule 6 of the CENVAT Credit Rules, 2004.

Whether Rule 6 could be invoked to demand an amount on the basis that common input services were used in the manufacture of dutiable and exempted goods.

Rules 3 and 6 of the CENVAT Credit Rules, 2004 were required to be read harmoniously: Rule 6 applies where common inputs or input services are used in the manufacture of both dutiable and exempted final products.

An intermediate product arising in an integrated manufacturing process, and captively consumed in or sent for further manufacture of the dutiable final product, cannot merely on that account be treated as an independently manufactured exempted final product.

The Tribunal relied on *Collector of Central Excise v. Eastend Paper Industries Ltd.*, 1989 (43) E.L.T. 201 (S.C.), which recognised that processes integrally connected with the ultimate production of goods form part of the manufacture.

It also applied *Rallis India Ltd. v. Union of India*, 2009 (233) E.L.T. 301 (Bom.), affirmed in *Union of India v. Hindustan Zinc Ltd.*, 2014 (303) E.L.T. 321 (S.C.), holding that Rule 6 is not attracted merely because an unavoidable or technologically necessary intermediate or by-product is exempted or cleared at nil rate.

The Tribunal found that processed milk was not independently manufactured as a final product or cleared as such.

It arose as an intermediate product in the continuous and integrated process of manufacturing sugar confectionery and was either captively consumed or sent to job workers for further use in that manufacture.

Applying the integrated-manufacturing principle in *Eastend Paper Industries* and the by-product/intermediate-product principle in *Rallis India* and *Hindustan Zinc*, the Tribunal held that the exempt status of processed milk under the notification did not transform it into an exempted final product for Rule 6 purposes.

Accordingly, the foundational premise for invoking Rule 6—that the appellant manufactured both dutiable and exempted final products—was absent.

The demands, interest, penalties, and related proceedings founded on the contrary view were set aside.

The impugned appellate orders were consequently quashed, with consequential relief in accordance with law, and both appeals were allowed.