Modvat credit on captive power start-up fuel upheld where Naphtha was used to run electricity generation for in-house consumption.

Modvat credit was treated as admissible on Naphtha used as Full Speed No Load fuel to start and keep a captive power turbine running, because the fuel was an essential start-up input for electricity generated within the assessee's own unit. Credit could be denied only to the extent inputs were used for electricity sent outside the premises; proportionate credit relating to power supplied to another unit had already been reversed. On that basis, the demand on the FSNL quantity failed, and the connected penalty and interest also ceased to survive.

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Issues: Whether Modvat credit was admissible on the quantity of Naphtha used as Full Speed No Load (FSNL) fuel for starting the turbine in the captive power plant, and whether penalty and interest could survive once the credit demand on that quantity failed.

Analysis: The FSNL quantity of Naphtha was found to be a necessary buffer used only to start and keep the turbine running, after which electricity could be generated. The material on record showed that electricity generated from the relevant plant was consumed within the assessee's unit, while proportionate credit relatable to electricity supplied to the other unit had already been reversed. Following the principle that credit can be denied only to the extent inputs are used for electricity sent out of the premises and not for the portion consumed captively, the demand on the FSNL quantity could not be sustained. Once the principal demand failed, the associated penalty and interest also ceased to survive.

Conclusion: Modvat credit on FSNL Naphtha was held admissible, and the demand, penalty, and interest were set aside in favour of the assessee.

Final Conclusion: The orders of the lower authorities were annulled and the appeals succeeded on the substantive credit issue, with all consequential liabilities vacated.

Ratio Decidendi: Credit cannot be denied on input fuel used as an essential start-up or running requirement for captive generation of electricity consumed within the assessee's own unit; denial is confined only to the proportion attributable to electricity actually sent outside.

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