Duty on waste and scrap of capital goods upheld, but penalty rejected where liability turned on rule interpretation.

Duty was payable on waste and scrap arising from capital goods cleared by a manufacturer after availing Modvat credit, because the relevant rule fastened liability on such waste and scrap and was not limited to scrap generated in the course of manufacture of the final product. The manufacturer, having taken the credit benefit, was required to comply with the rule's conditions, so the duty demand was sustained. Penalty was not imposable, as the dispute turned on interpretation of the governing rule and the facts did not justify a penal consequence. The Revenue therefore succeeded only on the duty issue, while the penalty was set aside.

---

---

Issues: (i) whether duty of central excise was payable on waste and scrap arising from capital goods cleared by the manufacturer after availing Modvat credit; (ii) whether penalty was imposable in the facts of the case.

Issue (i): whether duty of central excise was payable on waste and scrap arising from capital goods cleared by the manufacturer after availing Modvat credit.

Analysis: The relevant rule provided that where capital goods are sold as waste and scrap, the manufacturer is liable to pay the duty leviable on such waste and scrap. The availment of Modvat credit showed that the capital goods had been used in the manufacture of the final product, and the liability under the rule was not dependent on waste and scrap arising in the course of manufacture of the final product. A manufacturer who takes the benefit of the rule must also comply with its conditions.

Conclusion: Duty was payable on the waste and scrap of the capital goods, and the Revenue succeeded on this issue.

Issue (ii): whether penalty was imposable in the facts of the case.

Analysis: The dispute turned on the interpretation of the relevant rule governing duty on waste and scrap of capital goods. In such circumstances, penal consequence was not justified.

Conclusion: Penalty was not imposable.

Final Conclusion: The demand of duty on waste and scrap was sustained, but the penalty was set aside, resulting in a partial success for the Revenue.

---