Cenvat credit on captive power fuel and distinct tariff goods cannot be denied merely because surplus electricity leaves the factory.

Cenvat credit on fuel used in a captive power plant was held admissible where the fuel generated steam used within the factory, even though part of the electricity produced from that steam was supplied outside the factory. The relevant rule turned on use of the fuel for generating steam or electricity for manufacture or other purposes within the factory, so external supply of surplus electricity did not defeat credit. The text also states that superior kerosene oil could not be equated with aviation turbine fuel or motor spirit for denying credit, as those are distinct tariff goods. Credit denial on that basis was therefore unsustainable.

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Issues: (i) Whether credit on fuels used in the captive power plant was admissible when the steam generated from such fuels was used within the factory, though part of the electricity generated was supplied outside the factory. (ii) Whether superior kerosene oil was an ineligible input and whether credit relatable to the entire quantity received in the factory could be demanded on the footing that it was degraded aviation turbine fuel or motor spirit.

Issue (i): Whether credit on fuels used in the captive power plant was admissible when the steam generated from such fuels was used within the factory, though part of the electricity generated was supplied outside the factory.

Analysis: The relevant credit rule permitted credit on fuels used as inputs for generation of electricity or steam used for manufacture of final products or for any other purpose within the factory of production. The decisive consideration was that the fuel generated steam which was used inside the factory, and the subsequent use of electricity produced from that steam did not detract from credit eligibility. The availability of credit was not restricted by the fact that surplus electricity was sent outside the factory.

Conclusion: Credit on the entire fuel was admissible, and the assessee succeeded on this issue.

Issue (ii): Whether superior kerosene oil was an ineligible input and whether credit relatable to the entire quantity received in the factory could be demanded on the footing that it was degraded aviation turbine fuel or motor spirit.

Analysis: Superior kerosene oil, aviation turbine fuel and motor spirit were treated as distinct goods in the tariff scheme and could not be equated for denying credit. The objection that the show cause notice should have covered the entire quantity on the premise that the material was really motor spirit was rejected as misconceived. The finding that superior kerosene oil was not eligible input was therefore unsustainable.

Conclusion: The department's challenge failed on the credit-eligibility objection, and the assessee succeeded on this issue as well.

Final Conclusion: The allowance of credit on fuel used in the captive power plant was upheld, while the contrary view on superior kerosene oil was rejected, leaving the judgment in favour of both sides on their respective appeals.

Ratio Decidendi: Where fuel is used to generate steam within the factory, credit cannot be denied merely because the electricity generated from that steam is partly used outside the factory, and distinct tariff goods cannot be equated to deny Cenvat credit on a different input.

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