MODVAT credit on furnace oil used to generate steam remained admissible despite exemption of the final paper product.

MODVAT credit on furnace oil used as fuel for generating steam was admissible because Rule 57B of the Central Excise Rules, 1944 allowed credit on inputs used as fuel and on inputs used to generate steam within the factory, notwithstanding Rule 57A. The fact that the steam was used in manufacturing paper, including exempted final products, did not by itself defeat credit. The proviso to Rule 57C(2) specifically excluded fuel inputs from the restriction, and the cited authorities supported allowance of credit where the fuel was consumed in the manufacturing process. Revenue's objection to the credit was rejected.

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Issues: Whether MODVAT credit on furnace oil used as fuel for generating steam, which was used in the manufacture of exempted paper, was admissible under the Central Excise Rules, 1944.

Analysis: Furnace oil was used as fuel for generation of steam, and the steam was in turn used in the manufacture of paper. The relevant scheme under Rule 57B of the Central Excise Rules, 1944 permitted credit on inputs used as fuel and on inputs used for generation of steam used for manufacture of final products or for any other purpose within the factory, notwithstanding Rule 57A. The proviso to Rule 57C(2) specifically excluded inputs intended to be used as fuel. The cited authorities supported the view that credit could not be denied merely because one of the final products was exempt, where the fuel was used for generation of steam in the manufacturing process.

Conclusion: MODVAT credit on furnace oil was admissible, and the Revenue's objection to the credit failed.

Ratio Decidendi: Credit on inputs used as fuel for generating steam within the factory is allowable notwithstanding exemption of the final product, where the statutory scheme expressly extends MODVAT credit to such fuel-based inputs.

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