Modvat credit on capital goods survives despite sale of surplus electricity when no exclusive in-factory use condition exists.

Modvat credit on capital goods could not be denied merely because electricity generated from those goods was partly used in the factory and the surplus was sold to the State Electricity Board. The second proviso to Rule 57R(2), as it stood before omission on 1-9-1996, did not impose any express requirement that the electricity must be exclusively consumed within the factory. On a plain reading, no implied exclusive-use condition could be read into the proviso. The assessee therefore established a strong prima facie case for waiver of pre-deposit and stay of recovery.

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Issues: Whether Modvat credit on capital goods could be denied on the ground that electricity generated by using those capital goods was not entirely consumed within the factory and surplus electricity was sold to the State Electricity Board.

Analysis: The capital goods were accepted as eligible for Modvat credit under Rule 57Q of the erstwhile Central Excise Rules, 1944. The dispute turned on the scope of the second proviso to Rule 57R(2) after its omission with effect from 1-9-1996. The text of the proviso did not require that the electricity generated must be exclusively consumed within the factory. Part consumption within the factory was admitted, and the surplus electricity could not be stored and was necessarily disposed of by sale. On a plain reading, denial of credit could not rest on an implied condition of exclusive in-factory use.

Conclusion: The assessee made out a strong prima facie case, and waiver of pre-deposit with stay of recovery was granted.

Ratio Decidendi: Where the governing proviso does not impose an exclusive in-factory use requirement, Modvat credit on capital goods cannot be denied merely because surplus electricity generated from those goods is sold outside the factory.

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