2007 (7) TMI 2 - SC - Central Excise

Inputs (LSHS) used to generate electricity for captive manufacture of excisable goods eligible for MODVAT credit under Rule 57A(c)

COLLECTOR OF CENTRAL EXCISE Versus SOLARIS CHEMTECH LIMITED

SC held that inputs (LSHS) used to generate electricity captively consumed to manufacture excisable goods (e.g., cement, caustic soda) qualify for MODVAT ... Applicability of MODVAT credit - Rule 57A - Department contended that these inputs(LSHS) are utilized for manufacturing electricity which is not excisable and hence can’t be considered as input and accordingly not eligible for credit - HELD THAT:- At the outset, we may clarify that electricity is not an excisable item. Further, in this batch of civil appeals we are concerned with the electricity which is generated inside the plant by heating of LSHS and which is captively consumed and used to manufacture cement/caustic soda. Rule 57A, quoted above, has an Explanation clause which stated as to what inputs are included in MODVAT credit. Explanation clause (c) refers to 'input used as fuel'. This clause was introduced by Notification No. 4/94. At that time the Government made it clear that inputs used as fuel were entitled to MODVAT credit. In the present case, the LSHS is used to generate electricity which is captively consumed. With out continuous supply of such electricity generated in the plant it is not possible to manufacture cement, caustic soda etc. Without such supply the process of electrolysis was not possible. Therefore, keeping in mind the expression 'used in relation to the manufacture' in Rule 57A we are of the view that the assessees were entitled to MODVAT credit on LSHS. In our opinion, the present case falls in clause (c), therefore, the assessees were entitled to MODVAT credit under Explanatory clause (c) even before 16-3-95. Inputs used for generation of electricity will qualify for MODVAT credit only if they are used in or in relation to the manufacture of the final product, such as cement, caustic soda etc. Therefore, it is not correct to state that inputs used as fuel for generation of electricity captively consumed will not be covered as inputs under Rule 57A. Thus, we may point out that in some of the cases electricity generated is consumed by the residential colony of the factory's worker's families, schools etc., to that extent MODVAT credit will not be admissible. Accordingly appeals are dismissed. Issues involved: Determination of entitlement to MODVAT credit under Rule 57A on Low Sulphur Heavy Stock (LSHS) and furnace oil used for generating electricity captively consumed for manufacturing final products like caustic soda and cement.Analysis:1. Interpretation of Rule 57A: The key issue in this judgment revolves around the interpretation of Rule 57A regarding the applicability of MODVAT credit. The rule specifies the conditions for allowing credit of excise duty on specified goods used in or in relation to the manufacture of final products. The Explanation clause (c) added by Notification No. 4/94 is crucial, as it refers to 'inputs used as fuel.' This clause clarifies that inputs used for generating electricity, like LSHS, are eligible for MODVAT credit.2. Contention of the Department: The Department argued that LSHS is used for generating electricity, which is not an excisable item, and therefore, cannot be considered an input used as fuel under Explanation clause (c). They contended that since LSHS primarily generates electricity and not the final products like caustic soda and cement, MODVAT credit should not be allowed on the duty paid for LSHS.3. Court's Analysis and Ruling: The Court disagreed with the Department's interpretation, emphasizing that electricity generated from LSHS within the plant is crucial for manufacturing final products like caustic soda and cement. The Court highlighted that the continuous supply of electricity is essential for the manufacturing process and without it, the production would cease. Referring to previous judgments, the Court stressed that any operation integral to the manufacturing process qualifies as 'manufacture.' The Court interpreted the phrase 'used in relation to the manufacture of final products' broadly, ensuring that processes generating intermediate products, like electricity from LSHS, are considered integral to manufacturing.4. Entitlement to MODVAT credit: Ultimately, the Court ruled in favor of the assessees, stating that LSHS used for generating electricity, which is essential for manufacturing final products, falls within the ambit of the expression 'used in or in relation to the manufacture of the final product.' The Court clarified that MODVAT credit on LSHS for electricity generation is admissible under Explanation clause (c) of Rule 57A, even before a specific date mentioned. The judgment highlighted that inputs used for generating electricity qualify for MODVAT credit if they are integral to the manufacturing process of final products like cement and caustic soda.5. Additional Consideration: The Court also noted that in cases where electricity generated is consumed for non-manufacturing purposes, like residential colonies or schools, MODVAT credit would not be applicable. The judgment concluded that the civil appeals filed by the Department lacked merit and were dismissed, with no order as to costs.This detailed analysis of the judgment showcases the Court's thorough examination of the legal provisions, previous precedents, and the specific circumstances surrounding the entitlement to MODVAT credit for inputs used in electricity generation for manufacturing final products.