1. This appeal is by the Revenue challenging the order passed by the Customs, Excise and Service Tax Appellate Tribunal (for short hereinafter referred to as CESTAT) holding that the impugned product is not excisable and therefore, there is no liability to pay duty.

2. The assessee-M/s. Mangalore Refinery and Petrochemicals Ltd. is a holder of Central Excise Registration Certificate. It is engaged in the manufacture of various petroleum products including Lower Sulphur Heavy Stock (LSHS) failing under heading 27 of the schedule to the Central Excise Tariff Act, 1985 (for short hereinafter referred to as `the Act’). The LSHS was captively consumed for the generation of steam. The steam so generated was utilised for the generation of electricity. The assessee filed classification declaration for claiming exemption from payment of duty under notification No.67/95 CX dated 16.3.1995 for captive consumption of LSHS.

3. Intelligence gathered by the department indicated that the electricity so generated was being diverted for purposes other than the use in or in relation to the manufacture of petroleum products i.e. for construction purpose within the factory premises, lighting MRPL residential colony and sale to M/s. Hindustan Gas Industries Ltd. (HGIL). It was found that the exemption under the Notification supra was not admissible to LSHS captively manufactured for generating such electricity for other purposes. Such use of LSHS was not declared in their classification declarations and it resulted in contravention of the provisions of Rule 173B(2)(b). Accordingly, a show cause notice was issued demanding duty of Rs.33,12,928/- on the proportionate quantity of LSHS used in the generation of electricity, which in turn was not used in or in relation to the manufacture of final products during the period from April, 1996 to September, 1997. Proposal was also made to impose penalty under Section 11 AC of the Act and the Rules and also to demand interest u/s.11AB of the Act.

4. The Commissioner of Central Excise Bangalore III vide in Original order No.10/98 dated 28.10.1998 confirmed the demand of duty as proposed in the three show-cause notices. He also demanded interest and imposed penalty of 33,12,928/-. Aggrieved by the said order, the assesse appealed to CEGAT. The Tribunal by its final order No.423 to 425/02 dated 14.3.2002 remanded the matter for denova adjudication. After such remand while adjudicating the denova order, apart from three show cause notices which was subject matter earlier, three more show cause notices for subsequent period were also taken up for consideration. The Commissioner of Central Excise, Mangalore, vide order in original No.4/03 dated 26.2.2004 confirming the demand and duty, imposed penalty under Rule 173 Q of the Rules r/w. Section 11 AC of the Act. Interest under Section 11AB of the Act was also demanded. Aggrieved by the said orders, the assessee preferred an appeal to CESAT. In a similar case in respect of the order in original No.11/2001 dated 27.4.2001 duty of Rs.52,21,049/-was confirmed and penalty of Rs.5,00,000 was imposed on the assessee by the assessing Authority against which the assessee filed an appeal before the Commissioner of Appeals. The appeal was dismissed upholding the demand. Therefore, the assessee preferred appeal to the CESTAT both against the appellate order as well as the original order.

5. The specific case pleaded by the assessee was, LSHS manufactured in their refinery was captively consumed as fuel in the refinery operations and also used in steaming operations. The steam so developed was used captively in the manufacture of electricity within the refinery and that no portion of the LSHS has been moved outside the refinery. Their specific stand was LSHS was only an intermediate product intended only for captive consumption for use as fuel in the refinery operations and the Captive Power Plant; that LSHS was only a residue obtained while processing low Sulphur