Non-dutiability of scrap from worn-out machinery parts before Rule 3(5A) bars duty demand and penalty.

Waste and scrap arising merely from worn-out machinery parts of capital goods was not liable to central excise duty for the period before Rule 3(5A) of the Cenvat Credit Rules, 2004 took effect, because the scrap did not arise from manufacture or mechanical working of metals and no charging provision covered such clearances during the disputed period. Note 8(a) of Section XV of the Central Excise Tariff Act, 1985 was held inapplicable on those facts. As the duty demand failed, penalty under Section 11AC also could not survive.

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Issues: Whether waste and scrap generated from worn out machinery parts of capital goods was liable to central excise duty for the period prior to insertion of Rule 3(5A) of the Cenvat Credit Rules, 2004, and whether penalty under Section 11AC could survive.

Analysis: The waste and scrap in question arose only from worn out parts of old machinery and not from any manufacture or mechanical working of metals by the assessee. Note 8(a) of Section XV of the Central Excise Tariff Act, 1985 applies to metal waste and scrap arising from manufacture or mechanical working of metals and does not cover the present situation. The provision for payment of duty when capital goods are cleared as waste and scrap was introduced only with effect from 16-5-2005 by Rule 3(5A) of the Cenvat Credit Rules, 2004 through Notification No. 27/2005-C.E. (N.T.), whereas the disputed period was January 2001 to March 2003.

Conclusion: The demand of duty on the scrap was not sustainable, and the penalty also could not stand.

Final Conclusion: The impugned order was set aside and the appeal was allowed.

Ratio Decidendi: Waste and scrap arising merely from worn out machinery parts is not dutiable in the absence of a charging provision or manufacture, and penalty cannot be sustained where the underlying duty demand fails.

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