Captive-use exemption and CENVAT reversal: naphtha-linked electricity failed exemption, while proportionate credit reversal satisfied Rule 6.

Naphtha used to generate electricity for allied factory facilities did not qualify for exemption under Notification No. 67/95-CE because the conditions for captive-consumption exemption were not met, so the demand to that extent was sustained. For the remaining demand, reversal of credit on common inputs, together with the required declaration and supporting certificate, was treated as sufficient compliance with Rule 6 of the CENVAT Credit Rules for electricity used in the manufacture of exempted goods. Pre-deposit was directed only for the stated balance, with waiver and stay for the remainder during the appeal.

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Issues: (i) Whether naphtha used for generation of electricity for allied facilities within the factory was entitled to exemption under Notification No. 67/95-CE. (ii) Whether reversal of credit in respect of inputs used in naphtha and electricity generation satisfied the requirement under Rule 6 of the CENVAT Credit Rules for the quantity of electricity used in relation to exempted goods.

Issue (i): Whether naphtha used for generation of electricity for allied facilities within the factory was entitled to exemption under Notification No. 67/95-CE.

Analysis: The notification grants exemption to inputs captively consumed within the factory in or in relation to manufacture of final products, but specifically excludes inputs used in or in relation to manufacture of final products that are exempt or chargeable to nil rate, save for the stated exceptions. On the reading of the notification, naphtha used for generation of electricity for allied facilities did not satisfy the conditions for exemption.

Conclusion: The exemption under Notification No. 67/95-CE was not available for the naphtha attributable to electricity used for allied facilities, and the demand to that extent was upheld.

Issue (ii): Whether reversal of credit in respect of inputs used in naphtha and electricity generation satisfied the requirement under Rule 6 of the CENVAT Credit Rules for the quantity of electricity used in relation to exempted goods.

Analysis: For the remaining demand, the record showed reversal of credit on the common inputs and filing of the required declaration with supporting certificate. In these circumstances, the obligation under Rule 6 was treated as discharged for the electricity used in the manufacture of exempted goods.

Conclusion: The assessee was held to have complied with Rule 6 for the remaining portion of the demand.

Final Conclusion: Pre-deposit was directed only to the extent of Rs. 17 lakhs, and waiver with stay was granted for the balance during the pendency of the appeal.

Ratio Decidendi: Inputs used for generation of electricity do not qualify for exemption where the notification's conditions are not met, but proportionate reversal of common credit can discharge the obligation under the CENVAT credit scheme for exempted goods.

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