CENVAT credit on fuel for steam generation denied for diverted steam, while penalty was set aside for interpretative uncertainty.

CENVAT credit on furnace oil used to generate steam was allowed only to the extent the steam was used in or in relation to the assessee's own manufacture within the factory; credit attributable to steam supplied to a sister unit outside the factory was disallowed, with the demand and interest sustained. On penalty, differing Tribunal views on the admissibility issue showed bona fide interpretative uncertainty, so penal action was not justified and the penalty was set aside. The result was partial relief to the assessee and partial success for the Revenue.

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Issues: (i) Whether CENVAT credit on furnace oil used to generate steam was admissible to the extent the steam was supplied outside the assessee's factory to a sister unit. (ii) Whether penalty was imposable when the credit issue had been interpreted differently by different Benches.

Issue (i): Whether CENVAT credit on furnace oil used to generate steam was admissible to the extent the steam was supplied outside the assessee's factory to a sister unit.

Analysis: The relevant entry in Rule 57B(1) of the Central Excise Rules, dealing with goods used as fuel, was treated as pari materia with the corresponding clause in the earlier Rule 57A explanation. The controlling principle was that fuel used to generate steam or electricity is eligible for credit only to the extent the generated steam or electricity is used in or in relation to the manufacture of the assessee's final products within the factory. The portion of furnace oil relatable to steam diverted to the sister unit did not satisfy that requirement.

Conclusion: Credit on the furnace oil relatable to steam supplied outside the factory was not admissible, and the demand with interest was sustained.

Issue (ii): Whether penalty was imposable when the credit issue had been interpreted differently by different Benches.

Analysis: The issue of admissibility had been the subject of differing Tribunal views, and the assessee's availment of credit could not be treated as warranting penal action in those circumstances.

Conclusion: Penalty was not imposable.

Final Conclusion: The credit demand and interest were upheld, but the penalty was set aside, resulting in partial relief to the assessee and partial success for the Revenue.

Ratio Decidendi: Credit on fuel used to generate steam or electricity is admissible only to the extent that the resulting steam or electricity is used in or in relation to the assessee's own manufacture, and no penalty should follow where the legal position was subject to bona fide interpretative divergence.

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