Duty on waste scrap of capital goods fails without an applicable rule; DG set credit denied for lack of manufacturing use.

Duty on waste and scrap of old capital goods cleared during April to December 2002 was unsustainable because the relevant Cenvat regime for that period contained no applicable rule fastening such liability; the demand was therefore set aside. Credit on the DG set was denied because the assessee failed to show that it was used in manufacture or factory operations, so the credit disallowance was upheld. The wrongly availed credit also attracted penalty, which was sustained but reduced in amount.

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Issues: (i) whether duty could be demanded on waste and scrap of old and used capital goods cleared during the relevant period in the absence of an applicable rule; (ii) whether credit on the DG set was admissible and whether penalty was sustainable.

Issue (i): whether duty could be demanded on waste and scrap of old and used capital goods cleared during the relevant period in the absence of an applicable rule.

Analysis: The demand related to clearances made during April to December 2002. The record showed that, for that period, the applicable Cenvat regime did not contain a provision fastened with duty liability on clearance of waste and scrap of capital goods in the manner alleged. In the absence of a supporting rule applicable to the relevant period, the demand could not be sustained.

Conclusion: The demand of duty on waste and scrap of capital goods was set aside.

Issue (ii): whether credit on the DG set was admissible and whether penalty was sustainable.

Analysis: The allegation was that the DG set supplied electricity in the residential area of the factory. The assessee did not produce evidence to show that the DG set was used for manufacture or in the factory operations. On that footing, denial of credit was justified, and the wrongly availed credit also attracted penalty. Considering the circumstances, the penalty was reduced.

Conclusion: The denial of credit on the DG set was upheld and the penalty was sustained with reduction.

Final Conclusion: The appeal succeeded only on the demand relating to waste and scrap of capital goods and failed on the credit and penalty issues, resulting in a partial relief to the assessee.

Ratio Decidendi: In the absence of an applicable rule governing the clearance of waste and scrap of capital goods for the relevant period, duty cannot be demanded on such clearances; however, credit is inadmissible where the assessee fails to establish use of the equipment in the manufacturing activity.

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