Revenue-neutral captive power use limits duty demand, while non-manufacturing electricity consumption remains liable and penalties fall away.

Captively used fuel generating electricity was treated as eligible for Notification No. 67/95-C.E. relief to the extent the duty element was creditable, so the demand was not sustainable for electricity used in relation to dutiable or exempted manufacture on a revenue-neutral basis. Duty liability survived only for the portion of fuel attributable to electricity consumed in non-manufacturing activities such as residential premises, a guest house and a canteen, and the matter was remanded for quantification of that limited amount. Penalties were set aside because the dispute was bona fide and no mala fide intent was shown.

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Issues: (i) whether duty demand on fuel captively used for generation of electricity was sustainable where the electricity was used partly for dutiable goods, exempted goods and non-excisable activities; (ii) whether penalty was leviable in the circumstances.

Issue (i): whether duty demand on fuel captively used for generation of electricity was sustainable where the electricity was used partly for dutiable goods, exempted goods and non-excisable activities

Analysis: The exemption under Notification No. 67/95-C.E. was held not to be denied merely because electricity generated from the fuel was used in relation to exempted final products, since the duty on such fuel would be available as credit and the situation was revenue neutral. The demand was therefore not justified to that extent. However, electricity used for non-manufacturing purposes such as residential premises, guest house and canteen did not qualify for credit, and duty liability survived only for the portion of fuel attributable to that use. The matter was required to be quantified accordingly.

Conclusion: The demand was not sustainable on the revenue-neutral portion, but duty was payable to the extent fuel was used for electricity consumed in non-manufacturing activities; the matter was remanded for quantification.

Issue (ii): whether penalty was leviable in the circumstances

Analysis: The dispute was treated as bona fide, and no mala fide intent was found to justify penal consequences.

Conclusion: The penalties were set aside.

Final Conclusion: The assessee obtained relief on the principal controversy, the Revenue's challenge to the quantified demand failed, and only the limited duty liability relating to non-manufacturing use of electricity remained for fresh quantification.

Ratio Decidendi: Where captively used fuel generates electricity used in part for dutiable or exempted manufacture, the demand may be revenue neutral if the duty paid is creditable, but credit is unavailable for electricity consumed in non-manufacturing activities, and penalties are not warranted in a bona fide dispute.

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