Modvat credit for inputs used in an in-house water treatment plant was upheld as part of the factory process.

Modvat credit on alum used in a water treatment plant within the factory compound was held admissible because the plant formed an ancillary part of the paper-manufacturing process. The fact that the water treatment unit was separately located across a service road within the same premises did not require reversal of credit when the facilities were functionally connected and treated as part of the same factory arrangement for excise purposes. On that basis, the proposed duty demand, reversal of credit, and penalties under the Central Excise framework were not sustainable.

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Issues: Whether Modvat credit on alum used in a water treatment plant situated in the factory premises was admissible, and whether reversal of credit, duty demand, and penalties under Section 11AC of the Central Excise Act, 1944 and Rule 173Q of the Central Excise Rules were warranted.

Analysis: The water treatment plant and the paper factory were located in the same compound, though separated by a service road. The reasoning adopted was that water treatment formed an ancillary process in the manufacture of paper and, following the view that closely connected units within the same industrial may be treated as one factory for excise purposes, the credit taken on alum used in that plant need not be reversed. Reliance was also placed on the earlier Tribunal view and the departmental instruction cited in support of treating such facilities as part of the same factory arrangement.

Conclusion: Modvat credit on alum used in the water treatment plant was admissible, and the demand for reversal as well as the consequential penalties were not sustainable.

Final Conclusion: The revenue challenge failed, and the assessee's entitlement to credit was upheld.

Ratio Decidendi: Where a water treatment facility is situated within the factory compound and functions as an ancillary process in manufacture, input credit on materials used therein is admissible and need not be reversed merely because the plant is separately located within the same premises.

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