Modvat credit on fuel oil for captive electricity generation remained prima facie available despite sale of surplus power outside the factory.

Modvat credit on fuel oil used to generate steam and electricity is prima facie admissible where the generated energy is used within the factory for manufacture or other in-factory purposes. The relevant rule was read as requiring only that the input be used to produce electricity or steam, and that the output be so used in the factory. Sale of surplus electricity outside did not negate entitlement at the pre-deposit stage when the excess was merely unutilised remainder. On that basis, waiver of deposit and stay of recovery were treated as justified.

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Issues: Whether Modvat credit on fuel oil used to generate steam and electricity was admissible where part of the electricity generated was consumed within the factory and the balance was sold outside.

Analysis: The relevant rule was read as requiring that the input be used for generation of electricity or steam, and that the electricity or steam so generated be used for manufacture of final products or for any other purpose within the factory of production. On a prima facie reading, the condition was satisfied because the steam and electricity were generated within the factory and a substantial portion of the electricity was actually used in manufacture or for other in-factory purposes. The fact that the surplus electricity was sold did not displace the entitlement at the stage of pre-deposit, particularly when sale was only of the unutilised remainder.

Conclusion: The assessee had a prima facie case for Modvat credit and, accordingly, waiver of deposit and stay of recovery were justified.

Ratio Decidendi: Where inputs are used to generate electricity or steam within the factory and the generated electricity or steam is used within the factory for manufacture or other purposes, Modvat credit is prima facie available even if surplus electricity is sold outside.

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