Modvat scrap removal under departmental permission was held non-dutiable, with penalty and interest also failing.

Removal of aluminium scrap generated during manufacture under Modvat was treated as non-dutiable where the clearance occurred under departmental permission and in line with prevailing Board circulars under Rule 57F(2) of the Central Excise Rules, 1944. The Tribunal also noted that the department knew of the removals, so suppression of facts or mala fides was not established. On that basis, the duty demand failed on merits and on limitation, and the consequential levy of penalty under Section 11AC and interest under Section 11AB of the Central Excise Act, 1944 also could not be sustained.

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Issues: (i) whether the removal of aluminium scrap generated during the manufacturing process under Modvat was dutiable; (ii) whether the demand was barred by limitation and whether penalty and interest were sustainable.

Issue (i): whether the removal of aluminium scrap generated during the manufacturing process under Modvat was dutiable.

Analysis: The removal of the scrap had been undertaken under departmental permission and in the backdrop of Board circulars that permitted such removal without payment of duty under Rule 57F(2) of the Central Excise Rules, 1944. The Tribunal also relied on the Larger Bench view in Wyeth Laboratories Ltd. that waste or scrap of this nature was not liable to duty in the facts of the case.

Conclusion: The scrap was not liable to duty, and the demand on merits could not be sustained.

Issue (ii): whether the demand was barred by limitation and whether penalty and interest were sustainable.

Analysis: The removal of the scrap was within the knowledge of the department, and the earlier circular position supported the assessee's conduct. In these circumstances, suppression of facts or mala fides was not established. Since the demand itself could not be sustained on merits, the consequential levy of penalty under Section 11AC of the Central Excise Act, 1944 and interest under Section 11AB of the Central Excise Act, 1944 also failed.

Conclusion: The demand was not sustainable on limitation grounds, and penalty and interest were not leviable.

Final Conclusion: The Commissioner's order was set aside and the assessee succeeded on both merits and the consequential reliefs.

Ratio Decidendi: Where scrap generated in manufacture is removed under departmental permission and prevailing Board circulars, and suppression or mala fides is not established, duty demand and consequential penalty and interest cannot be sustained.

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