Hon’ble Saumitra Dayal Singh, J.—This reference has been made under Section 35(H) of the Central Excise Act, 1994. It arises from the order of the Customs, Excise Service Tax Appellate Tribunal, New Delhi (hereinafter referred to as the Tribunal) dated 7.3.2003. The dispute pertains to the period April 1996 to August 1996. The reference itself was made on the following questions of law :

“(i) Whether STEAM should not be treated as final product when it is not only manufactured through a conscious activity undertaken by the respondents but also requires several well defined steps to manufacture it?

(ii)Whether the benefit of Rule 57-D (1) of the erstwhile Central Excise Rules, 1944 should be extended to STEAM by treating it as a by-product or whether the restriction envisaged under Rule 57-C should be applied for availing credit on inputs used in or in relation to the manufacture of STEAM by treating it as a final product as STEAM is exempted from duty?

(iii) Whether for denial of credit under Rule 57-C of the erstwhile Central Excise Rules, 1944 the inputs must be directly linked to the final product?”

2. The Tribunal by its final order dated 7.3.2003 had allowed the appeal filed by the assessee and held that the ‘off gases’/‘lean gases’ were a by-product obtained in the manufacture of Carbon Black from Carbon Black Feed Stock (CBFS in short). The Tribunal had relied upon Rule 57D(1) of the Central Excise Rules, 1944 (hereinafter referred to as the Rules) and held that credit shall not be denied to the assessee on any part of the input i.e. CBFS by attributing its utilization in manufacture of ‘steam’ cleared at nil rate of duty.

3. The assessee manufactured Carbon Black, that are goods classifiable under Chapter 28 of the First Schedule to the Central Excise Tariff Act, 1985 (hereinafter referred to as the Tariff Act), using CBFS as raw material/input. In that process, RFO/LSHS/LDO/FO was used as fuel.

The assessee, subjected CBFS to process known as thermal cracking. It resulted in production of Carbon Black in particle form. However, in this process, ‘off gases’ also known as ‘lean gases’ emerged by way of technological necessity. Basically, those gases were crude hydrocarbon gases having high content of Carbon Monoxide. According to the assessee Carbon Monoxide being a hazardous gas, it could not be released freely into the atmosphere. Therefore, the assessee burnt the Carbon Monoxide content in the ‘off gases’/‘lean gases’ before releasing the same into the atmosphere.

4. The burning of Carbon Monoxide generated heat that could either be allowed to escape or be put to use, which the assessee did by generating ‘steam’ from de-mineralised raw water treated with caustic soda and hydrochloric acid, by employing a boiler. The ‘steam’ so generated were then used, in part, to pre-heat CBFS (subjected to thermal cracking process to manufacture Carbon Black). The remaining quantities of ‘steam’ were sold to M/s Hindalco Industries Ltd., Renukoot, at nil rate of duty.

5. According to the Tribunal, in the above described second part of the activity conducted by the assessee, no part of the CBFS or any other input (that had gone into manufacture of Carbon Black), was used/consumed. The Tribunal thus concluded - mere fact of use of ‘off gases’/‘lean gases’ to generate heat that in turn was used to obtain ‘steam’ did not tantamount to utilisation of CBFS in the manufacture of exempted product i.e. steam. It would be useful to extract the finding of the Tribunal in this regard:

“No doubt the steam has been generated by the appellants as a conscious act but it cannot be claimed by the Revenue that any part of the inputs, that is CBFS or any other inputs which has gone into the manufacture of Carbon Black has been used in the manufacture of steam. For the purpose of applying the provisions of Rule 57 (C) or 57 CC, it is the pre-requisite that the inputs are used in the manufacture of products which are exempted from the whole of