Cenvat credit on fuel for electricity sold outside the factory was denied, while penalty was set aside for interpretational dispute.

Cenvat credit on naphtha used to generate electricity was held inadmissible where the electricity was sold or supplied outside the factory, because the credit scheme protects only input use that results in electricity consumed within the factory of production. Authorities and decisions relating to captive consumption or in-factory use were distinguished on that basis. On penalty, the dispute was treated as one of statutory interpretation and scope of admissible input use, so penal consequences were not justified. Duty demand and interest were sustained, while penalties were annulled, giving the assessee only partial relief.

---

---

Issues: (i) Whether Cenvat credit on naphtha used as fuel for generation of electricity was admissible when the electricity was sold or supplied outside the factory to joint venture concerns and vendors; (ii) Whether penalty was sustainable in the circumstances.

Issue (i): Whether Cenvat credit on naphtha used as fuel for generation of electricity was admissible when the electricity was sold or supplied outside the factory to joint venture concerns and vendors.

Analysis: Credit is available only when the input is used for generation of electricity or steam within the factory of production and the resulting electricity is used within that factory. Where the electricity generated from the input is not so used and is instead sold or supplied outside the factory, the use falls outside the protective ambit of the relevant Cenvat credit scheme. The decisions relied upon for electricity used within the factory or for captive consumption did not assist the assessee on these facts.

Conclusion: The disallowance of Cenvat credit on naphtha used to generate electricity sold or supplied outside the factory was upheld and the issue was decided against the assessee.

Issue (ii): Whether penalty was sustainable in the circumstances.

Analysis: The dispute turned on interpretation of the credit provisions and the scope of admissible input use. In such a case, penal consequences were not warranted.

Conclusion: The penalty was set aside and this issue was decided in favour of the assessee.

Final Conclusion: The duty demand and interest were sustained, while the penalties were annulled, resulting in only partial relief to the assessee.

Ratio Decidendi: Cenvat credit on fuel used for generation of electricity is admissible only to the extent the electricity is used within the factory of production, and not when it is supplied outside the factory; penalty is not justified where the dispute is purely interpretational.

---