Concessional excise duty on fuel inputs is denied only for diverted use, while penalties for the alleged violation were set aside.

Concessional excise duty on naphtha/NGL used for manufacturing fertilizers and ammonia was held to remain available except where part of the inputs was diverted to generate electricity supplied to a residential township. Duty could not be demanded on the entire quantity used for power generation; it was confined to the quantity attributable to township supply, subject to verification by the jurisdictional officer. The associated valuation enhancement was similarly limited to that extent. Penalties under the Central Excise Rules were set aside because the governing rule did not authorise penalty for the alleged violation in the manner asserted.

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Issues: (i) Whether naphtha/NGL procured at concessional rate of duty for manufacture of fertilizers and ammonia remained eligible for the concession when a part was used for generating electricity supplied to the residential township. (ii) Whether the penalties imposed under the Central Excise Rules were sustainable.

Issue (i): Whether naphtha/NGL procured at concessional rate of duty for manufacture of fertilizers and ammonia remained eligible for the concession when a part was used for generating electricity supplied to the residential township.

Analysis: The concession was available only so long as the inputs were used for the intended manufacturing purposes. Following the earlier binding view that power generation linked to factory operations did not attract denial of the concession, the diversion of electricity to the residential township stood on a different footing. The duty liability, therefore, could not be fastened on the entire quantity of inputs used for generation of electricity, but only on the quantity attributable to electricity supplied to the township, to be worked out on verification by the jurisdictional officer. The consequential valuation enhancement was also confined to that limited quantity.

Conclusion: The concession was denied only to the extent of inputs used for generating electricity supplied to the township, and the demand was restricted accordingly.

Issue (ii): Whether the penalties imposed under the Central Excise Rules were sustainable.

Analysis: The penalties had been imposed for the alleged misuse of inputs procured under the concessional notifications. However, the governing view already accepted that penalty under Rule 173Q was not imposable for violation of Rule 196 in the manner alleged, and the earlier decision in the appellants' own matter supported that position. On that basis, the penal component could not stand.

Conclusion: The penalties were set aside.

Final Conclusion: The demands were sustained only to the limited extent of inputs used for electricity supplied to the residential township, while the remaining duty dispute was confined to verification and the penalties were annulled, resulting in a partial success for the assessee.

Ratio Decidendi: Concessional excise duty on inputs can be denied only to the extent those inputs are diverted from the intended exempt use, and penalty cannot be imposed where the governing rule does not authorise it for the alleged violation.

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