Modvat credit on fuel used to generate steam in manufacturing remains available despite exempt intermediate steam.

Modvat credit was admissible on L.D.O. used as fuel in boilers to generate steam for confectionery manufacture, because the fuel was used in or in relation to the manufacturing process itself. The exemption status of the steam did not defeat credit where the steam participated in production of the final goods. The amendment to Rule 57D effective from 18-3-1995 was held irrelevant to the claim on the facts presented, as entitlement flowed from the nature of the fuel's use. Credit was therefore upheld and the disallowance by the lower authorities was unsustainable.

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Issues: Whether Modvat credit was admissible on L.D.O. used as fuel in boilers for generating steam used in the manufacture of confectionery, despite the steam being an exempt product and notwithstanding the amendment to Rule 57D with effect from 18-3-1995.

Analysis: The dispute turned on whether the fuel was an input used in or in relation to the manufacture of the final products. The steam generated from burning L.D.O. was used in the production process of confectionery. The amendment to Rule 57D, which specifically dealt with inputs used for generation of electricity or steam, was held to have no bearing on the claim, because the admissibility of credit flowed from the nature of the fuel's use in the manufacturing process itself. The fact that steam was treated as an exempt product did not prevent the input credit where the steam participated in the manufacture of the final goods.

Conclusion: Modvat credit on L.D.O. was admissible and the disallowance by the lower authorities was unsustainable.

Final Conclusion: The assessee succeeded and the denial of credit was set aside.

Ratio Decidendi: Fuel used to generate steam employed in the manufacturing process qualifies as an input used in or in relation to manufacture, and credit cannot be denied merely because the steam is treated as an exempt intermediate product.

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