Steps Taken:

1) Configuration changed: _INTRC_OSC_NOCLKOUT
2) Made 16f688 run at 8MHz : OSCCON=%01110001
3) Commented DEFINE I2CSLOW 1
4) Value changed to BYte (then to word again)

I get a byte back from the device (from what I have understood). Yes there is an address 0 in the device. I should get back chip ID i.e-'2E' as per the datasheet.

Still no Luck.