CESTAT Rules in Favor of Manufacturer on Naphtha Duty Reversal

The Appellate Tribunal CESTAT, Mumbai ruled in favor of the appellant, a plastic raw material manufacturer engaged in electricity generation using naphtha, natural gas, or high-speed oil. The Tribunal held that duty on naphtha used for generating electricity wasted due to uncontrollable circumstances need not be reversed. Additionally, as the source of sold electricity was a mix of fuels, credit reversal was limited to the portion notionally attributed to naphtha-generated electricity. The appeal was allowed, setting aside the duty demand on naphtha used in electricity generation and providing consequential relief to the appellant.

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Issues: Duty credit on naphtha used in electricity generation, demand of duty on wasted electricity, reversal of credit on naphtha used in electricity production, identification of electricity generated by specific fuel for credit reversal.

In this judgment by the Appellate Tribunal CESTAT, Mumbai, the appellant, engaged in manufacturing plastic raw material, also operated a plant for co-generation of electricity and steam using naphtha, natural gas, or high-speed oil as raw materials. The Commissioner demanded duty on the naphtha used in generating electricity that was fed into the grid of the Gujarat Electricity Board. The appellant argued that the electricity wastage should not incur duty as it was not utilizable due to circumstances beyond control, citing a previous judgment concerning waste electricity. The Tribunal agreed, stating that the duty credit on naphtha used for generating such waste electricity need not be reversed, as per Rule 57D concerning waste inputs in the manufacturing process.

Regarding the sale of electricity, the appellant contended that the electricity sold was not solely produced using naphtha, but a mix of natural gas and high-speed diesel oil. As it was impossible to identify the exact source of the sold electricity due to simultaneous generation from multiple turbines using different fuels, the Tribunal ruled in favor of limiting the credit reversal to the quantity notionally attributed to naphtha-generated electricity. The matter was remanded to the Commissioner for this specific credit reversal.

Ultimately, the appeal was allowed, and the impugned order demanding duty on naphtha used in electricity generation was set aside. The Tribunal provided consequential relief to the appellant, emphasizing the need for credit reversal only on the portion of electricity notionally linked to naphtha.

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