2006 (1) TMI 314 - AT - Central Excise

Summary

Issues:
- Recovery of Modvat credit availed on Naphtha used in generating electricity
- Consideration of FSNL Naphtha quantity in electricity generation
- Admissibility of Modvat credit on inputs used for electricity generation

Analysis:

Issue 1: Recovery of Modvat credit on Naphtha used in generating electricity
The appellants were engaged in manufacturing excisable goods and availed Modvat credit on inputs, including Naphtha used in generating electricity. The Revenue issued Show Cause Notices for the recovery of Modvat credit availed on Naphtha used in running or starting turbines at Full Speed No Load (FSNL). The demands included penalties under Section 11AC and Rule 173Q(l)(bb) along with interest. The Tribunal found that the proportionate credit on Naphtha actually utilized for electricity transmitted to another unit had been reversed. Citing a previous decision, the Tribunal held that only the Naphtha and credit availed on such Naphtha used for actual electricity generation could be denied credit. As the proportionate credit on Naphtha used for electricity supplied to the other unit had been reversed, the appeal was granted.

Issue 2: Consideration of FSNL Naphtha quantity in electricity generation
The appellants argued that the FSNL Naphtha quantity was essential for starting up electricity generation at their plant. They presented a report from a Chartered Engineering Company supporting their claim that the FSNL Naphtha quantity merely kept the turbine running and did not contribute to electricity generation. The Tribunal noted that the FSNL Naphtha was a buffer quantity consumed within the plant and not sent out. The Revenue had appointed an independent Cost Accountant-cum-Chartered Engineer to study the matter, but the appellants contested the findings. The Tribunal emphasized that if no additional load was generated, denying credit on FSNL quantity for electricity generation within the plant was unwarranted. The appeal was allowed as the recovery of credit on FSNL quantity was found unnecessary.

Issue 3: Admissibility of Modvat credit on inputs used for electricity generation
The Tribunal referred to a previous case where Modvat was deemed admissible on inputs used for generating electricity within the factory, but not for electricity transmitted to the State Electricity Grid. In the present case, the Tribunal found that the proportionate credit on Naphtha used for electricity transmitted to another unit had already been reversed by the appellants. Therefore, the denial of credit on FSNL quantity on a proportionate basis was not upheld, leading to the setting aside of penalties and interest. The orders of the lower authorities were overturned, and the appeals were allowed.

This comprehensive analysis of the judgment highlights the key issues, arguments presented, relevant legal principles applied, and the ultimate decision reached by the Tribunal.