Factory exemption and electricity diversion: fuel used for residential supply falls outside the notification, with extended limitation sustained

Notification No. 67/95-C.E. was held inapplicable to the portion of fuel used to generate electricity that was diverted to a residential colony, because the exemption covered inputs used within the factory in or in relation to manufacture. Nondisclosure of the diversion amounted to suppression of material facts, so invocation of the extended period of limitation was sustained. On penalty, the adjudicating authority was treated as having discretion to impose a lesser amount where the statute prescribes only a maximum, and the penalty was maintained only to the reduced extent.

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Issues: (i) Whether the benefit of Notification No. 67/95-C.E. was available in respect of fuel used for generation of electricity when part of such electricity was supplied to the residential colony; (ii) Whether invocation of the extended period of limitation and imposition of penalty were sustainable.

Issue (i): Whether the benefit of Notification No. 67/95-C.E. was available in respect of fuel used for generation of electricity when part of such electricity was supplied to the residential colony.

Analysis: The exemption applied only to inputs manufactured in the factory and used within the factory of production in or in relation to the manufacture of the specified final product. The fuel was used to generate electricity for the manufacturing unit, but a part of the electricity was diverted for use in the residential colony. The issue was treated as already settled against the assessee in its own earlier matter, and the exemption could not extend to the portion of fuel attributable to electricity not used within the refinery/factory.

Conclusion: The benefit of Notification No. 67/95-C.E. was not available for the disputed portion of the fuel.

Issue (ii): Whether invocation of the extended period of limitation and imposition of penalty were sustainable.

Analysis: The fact that part of the electricity generated from the duty-free inputs was used in the residential colony was not disclosed. On that basis, suppression of material facts was found and the extended period was held to be rightly invoked. As regards penalty, the adjudicating authority was found to have discretion to impose a lesser penalty where the statute prescribes a maximum, and the circumstances justified reduction.

Conclusion: Invocation of the extended period was upheld, and the penalty was sustained only to the reduced extent.

Final Conclusion: The exemption claim failed in substance, the extended period of limitation was sustained, and the penalty was reduced while the remainder of the order was upheld.

Ratio Decidendi: An exemption for inputs used within the factory does not extend to fuel used to generate electricity that is partly diverted for non-factory purposes, and nondisclosure of such diversion justifies invocation of the extended period, while the quantum of penalty may be reduced within the adjudicator's discretion.

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