Captive electricity fuel qualifies for Modvat credit when it is integrally connected with manufacture and not diverted to non-manufacturing use.

LSHS used as fuel to generate electricity captively consumed in manufacturing cement and caustic soda was treated as an eligible input for Modvat credit under Rule 57A. Explanation clause (c), inserted by Notification No. 4/94, covered inputs used as fuel, and the expression "used in or in relation to the manufacture of final products" was read broadly to include processes integrally connected with manufacture and intermediate stages necessary for production. Because uninterrupted captive electricity was essential to manufacture, credit was available; however, it was not admissible to the extent the electricity was diverted to non-manufacturing uses such as residential colonies and schools.

---

---

Issues: Whether LSHS used as fuel for generating electricity captively consumed in the manufacture of cement and caustic soda qualifies for Modvat credit under Rule 57A.

Analysis: Explanation clause (c) to Rule 57A, introduced by Notification No. 4/94, treats inputs used as fuel as eligible inputs. The electricity generated from LSHS was produced within the factory and was captively consumed in the manufacture of the final products. The expression "used in or in relation to the manufacture of final products" was applied in its broad sense, covering processes integrally connected with manufacture and intermediate stages necessary for production. Since uninterrupted electricity generated from LSHS was essential for the manufacture of cement and caustic soda, the fuel used for such generation fell within the eligible input category. Credit was not admissible only to the extent electricity was diverted for residential colony, schools and similar non-manufacturing use.

Conclusion: LSHS used for generation of electricity captively consumed in the manufacture of the final products was eligible for Modvat credit, and the Department's appeals failed.

Ratio Decidendi: Inputs used as fuel for generating captive electricity are eligible for Modvat credit when the electricity is integrally connected with and to the manufacture of the final product, because the phrase "in or in relation to manufacture" receives a wide construction.

---