2007 (12) TMI 329 - AT - Central Excise

Issues Involved:
1. Admissibility of MODVAT/CENVAT credit on LSHS and additive fuel oil used to generate electricity and steam diverted outside the factory.
2. Duty liability of Hydrogen gas manufactured and captively consumed in producing steam cleared to sister units.
3. Admissibility of credit on LSHS relatable to electricity lost in conversion from AC to DC power.
4. Validity of penalties and interest imposed.

Detailed Analysis:

1. Admissibility of MODVAT/CENVAT Credit on LSHS and Additive Fuel Oil:
The appellants argued that they were entitled to credit for the entire LSHS used, including that portion used to generate electricity and steam supplied outside the factory. They contended that there was no prohibition on using electricity/steam produced from MODVAT availed inputs for purposes other than manufacturing final products, including transfer to other factories. The Commissioner denied credit based on Rules 57C and 57D(2) for different periods, which the appellants argued was incorrect. They claimed that their eligibility for credit had been upheld in previous orders (Final Order Nos. 1242-1245/2000). The Tribunal held that inputs used for generating electricity or steam, which were then diverted outside the factory, were not eligible for credit, as per Rule 57B(iv) effective from 1-3-1997. The Tribunal concluded that the impugned demands were sustainable based on the legal provisions and previous judgments, including the Supreme Court's decision in CCE v. Solaris Chemtech Ltd. (2007).

2. Duty Liability of Hydrogen Gas:
The appellant contested the demand for duty on Hydrogen gas used in the production of steam cleared to sister units. The Tribunal referenced the decision in Bajaj Tempo Ltd. v. Collector of Central Excise Pune (1994) and concluded that intermediate products removed to sister units manufacturing and clearing dutiable final products need not pay duty. Therefore, the demand on Hydrogen gas was not sustainable.

3. Admissibility of Credit on LSHS Relatable to Electricity Lost in Conversion from AC to DC Power:
The Tribunal found that the loss of power in converting AC to DC was an inevitable process loss and that credit could not be denied on inputs for such waste. Consequently, the demand on this account was vacated.

4. Validity of Penalties and Interest Imposed:
The Tribunal noted that penalties under Section 11AC could not be imposed for periods prior to 28-9-1996. It was also found that the interest demanded without invoking Section 11AB in the Show Cause Notices was unsustainable. The Tribunal emphasized that penalties were not justified where demands arose from different norms adopted by the assessee and the department. The Tribunal remanded the case for re-adjudication, allowing the assessee to provide actual figures with supporting records for LSHS consumption.

Conclusion:
The Tribunal allowed the appeals by way of remand, directing the original authority to adjudicate the cases afresh in light of the Tribunal's observations. The decision emphasized the inadmissibility of credit for inputs used to generate electricity or steam diverted outside the factory, the non-sustainability of duty on Hydrogen gas, the acceptance of process losses in power conversion, and the need for proper quantification of LSHS consumption. Penalties and interest were also addressed, with specific instructions for re-assessment.

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