Captive power exemption denied for wheeled-out electricity, while non-marketability plea failed and penalty was waived.

Captive consumption exemption under Notification No. 67/95-CE was held unavailable for naphtha and refinery fuel oil used to generate electricity to the extent the power was wheeled out to the State Electricity Board, and the duty demand was sustained on a proportionate basis. The plea that captively used naphtha was non-marketable and therefore non-excisable was rejected because it was capable of use as fuel in a gas turbine and no convincing material showed it to be non-commercial grade. Penalty, however, was set aside as the circumstances did not justify penal action.

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Issues: (i) Whether the benefit of Notification No. 67/95-CE was available in respect of naphtha/refinery fuel oil used in generating electricity, to the extent the electricity was wheeled out to the State Electricity Board; (ii) whether the plea that the captively used naphtha was non-marketable and therefore non-excisable could defeat the duty demand; and (iii) whether penalty was sustainable.

Issue (i): Whether the benefit of Notification No. 67/95-CE was available in respect of naphtha/refinery fuel oil used in generating electricity, to the extent the electricity was wheeled out to the State Electricity Board.

Analysis: The exemption for captive consumption was not available where the electricity generated in the captive power plant was wheeled out. The demand had been worked out proportionately to the quantity of electricity wheeled out, and this position was treated as settled law and not seriously disputed.

Conclusion: The denial of exemption and the resulting duty demand were upheld.

Issue (ii): Whether the plea that the captively used naphtha was non-marketable and therefore non-excisable could defeat the duty demand.

Analysis: The plea of non-marketability was rejected on the basis of the detailed reasoning recorded by the original authority. The captively used naphtha was held capable of use as fuel in a gas turbine for electricity generation, and no convincing material was shown to establish that it was a non-commercial grade or otherwise incapable of being marketed.

Conclusion: The plea of non-marketability was rejected and the duty demand was sustained.

Issue (iii): Whether penalty was sustainable.

Analysis: Although the duty demand and interest were sustained, the facts and circumstances did not justify penal action against the appellant.

Conclusion: Penalty was set aside.

Final Conclusion: The appeal succeeded only to the limited extent of deletion of penalty, while the duty demand and interest were maintained.

Ratio Decidendi: Where captive power generation electricity is wheeled out, exemption meant for captive consumption is unavailable to the proportionate input quantity attributable to such wheeled-out electricity, and penalty may still be waived if the circumstances do not warrant it.

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