2006 (2) TMI 367 - AT - Central Excise

Duty demand - disallowance of Modvat/Cenvat credit on furnace oil use for generation of electricity - Electricity used part of the factory and partly for the township - residential colony/township can be consider as a part of the factory? - Factory of production - confiscation - Penalty - Quantum of - HELD THAT - We find that the adjudicating Commissioner has correctly noted the provisions under the relevant rules, which allow credit of duty on furnace oil used in electricity generation provided such electricity is used for production of final products and also for other purposes so long as it is used within the factory of production. He has passed a detailed speaking order and has held that in respect of the electricity used in the residential premises/township the appellants are not eligible for the input duty credit, on the ground that such residential area is not part of the factory premises nor it can be considered to be falling within precincts of the factory premises. He has also referred to Explanation-II to the definition of factory under the Factories Act, 1948, which states that the area where an Electronic Data Processing Unit is installed in any premises or part thereof, shall not be construed as a factory if no manufacturing process is carried on in such area. It is undisputed that neither any manufacturing nor any process connected with the production of excisable goods is carried on in such residential premises/township. Accordingly, we are of the view that the appellants are not entitled to input duty credit on furnace oil used for generation of electricity supplied to such residential premises/township. We also note that the adjudicating Commissioner has rightly recorded in his order that the appellants are not eligible for the impugned credit and yet they willfully and wrongly availed the same without any intimation to the department. Hence, we are of the view that the duty demand has been correctly confirmed by the adjudicating Commissioner applying the extended period of limitation. However, as regards the redemption fine, we are of the view that the same is not warranted in the circumstances of the case including the fact that the goods are not available for confiscation. We, therefore, set aside the redemption fine. As regards the penalty of Rs. 30 lakhs, we are of the view that the same is disproportionately high considering the amount of ineligible input duty credit involved. Hence, we reduce the penalty from Rs. 30 lakhs to Rs. 5 lakhs (rupees five lakhs) only. As regards the interest, we are of the view that the same is payable in accordance with the legal provisions in force. The appeal is partly allowed as above.

Summary

Issues:
Duty demand confirmation on Modvat/Cenvat credit for furnace oil used in electricity generation for residential colony/township, imposition of redemption fine, penalty, and interest.

Analysis:
1. The adjudicating Commissioner confirmed a duty demand of Rs. 28,58,643/- disallowing Modvat/Cenvat credit on furnace oil for electricity generation for the period 1997-98 to 2001-02. A redemption fine of Rs. 20 lakhs was imposed, along with a penalty of Rs. 30 lakhs and recovery of appropriate interest.

2. The Bench, during the stay application consideration, found no prima facie case for the appellants and asked for a pre-deposit of Rs. 20 lakhs towards duty, which was complied with. The appeal was expedited due to an early hearing application by the Revenue.

3. The appellant argued that the township should be considered part of the factory premises, justifying credit for furnace oil used in electricity generation. Cited case laws supported their stance, challenging the longer limitation period, penalty, and interest imposed.

4. The Respondent supported the Commissioner's decision, citing Tribunal decisions in favor.

5. The Tribunal noted that the appellants used electricity within the factory and township, claiming Modvat/Cenvat credit for duty paid on all furnace oil used for electricity generation.

6. The Commissioner correctly applied rules allowing credit for furnace oil used in electricity generation within the factory premises. The Tribunal upheld the decision that the residential area is not part of the factory, referencing the Factories Act's definition of 'factory.'

7. Various case laws were analyzed, emphasizing the need for electricity usage within factory premises to claim credit. The Tribunal found that the residential premises in the township did not qualify as part of the factory, based on legal definitions and precedents.

8. The argument that the township was part of the approved ground plan was dismissed, clarifying that the factory's scope is defined under the Central Excise Act, excluding residential areas.

9. The definition of 'factory' under the Central Excise Act clarified that residential areas cannot be considered part of the factory, leading to the denial of input duty credit for furnace oil used in the township.

10. The Tribunal upheld the duty demand due to willful misuse of credit without departmental notification. The redemption fine was set aside, and the penalty reduced to Rs. 5 lakhs, considering the amount of ineligible credit. Interest payment was deemed necessary as per legal provisions.

11. The appeal was partially allowed, with the decision pronounced on 20-2-2006.