Capital goods credit for co-generation plant upheld where equipment was received for integrated factory use before production began

Capital goods credit remained admissible for equipment installed in an integrated co-generation plant for a sugar mill, because eligibility is tested by the nature of the goods and their intended use when received in the factory set-up. The fact that the power plant started operating before the sugar mill, and electricity was temporarily supplied to the grid before commencement of dutiable production, did not alter the character of the capital goods or defeat credit. The reasoning of the precedent relied on by the Revenue was treated as inapplicable because the goods were not used exclusively for exempted goods in the relevant sense.

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Issues: Whether capital goods credit was admissible on equipment installed for a co-generation plant when, on the date of receipt, the sugar mill was not yet operational and the plant generated electricity that was temporarily supplied to the grid before the factory commenced production of dutiable final products.

Analysis: The admissibility of credit on capital goods is to be tested with reference to their receipt and intended use in the factory. The co-generation plant formed part of the assessee's integrated manufacturing set-up for the sugar mill, and the capital goods were procured to establish a facility that would ultimately support manufacture of dutiable excisable goods. The fact that the power plant commenced earlier than the sugar mill, and that electricity was supplied externally for a period before full commencement of the factory, did not change the character of the capital goods or the intended manufacturing use. The reasoning in the precedent relied upon by the Revenue was held inapplicable because the goods were not used exclusively for exempted goods in the relevant sense, and the later operational sequence did not defeat credit already attached to the capital goods when received for the factory project.

Conclusion: The assessee was entitled to capital goods credit, and denial of credit on the ground that the co-generation plant was operational before the sugar mill could not be sustained.

Final Conclusion: The demand, penalty, and the impugned order were set aside, and the appeal was allowed in full.

Ratio Decidendi: Eligibility for capital goods credit is determined by the nature and intended use of the goods at the time of receipt in the manufacturing set-up, and subsequent delay in commencement of dutiable production does not by itself extinguish the credit where the capital goods were procured for an integrated factory project involving dutiable final products.

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