Cenvat credit on fuel for captive power is limited to electricity or steam used within the factory; external supply is excluded.

Cenvat or Modvat credit on naphtha used to generate electricity or steam is available only to the extent the resulting electricity or steam is consumed within the factory of production. Where part of the generated electricity or steam is supplied outside the factory, that portion does not qualify for full credit, and only proportionate credit tied to captive consumption is admissible. The exclusion principle applies because credit is confined to inputs used in or in relation to manufacture within the factory, and the portion cleared outside falls outside that entitlement. The order granting full credit was therefore set aside, and the matter was remitted for consideration of the remaining excluded claim.

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Issues: Whether credit on naphtha used for generation of electricity and steam is admissible when a part of the electricity or steam is supplied outside the factory of production.

Analysis: The relevant rule allows credit for inputs used in or in relation to manufacture, including inputs used as fuel and inputs used for generation of electricity or steam, only when such electricity or steam is used within the factory of production for manufacture of final products or for any other purpose. Where the generated electricity or steam is cleared outside the factory, the assessee is entitled only to proportionate credit to the extent of captive consumption. The principle is governed by the Supreme Court's ruling that credit is unavailable for the portion of electricity sold or supplied outside the factory.

Conclusion: Credit was not allowable in full on the quantity attributable to electricity or steam supplied outside the factory, and the Revenue's contention succeeded on this issue.

Final Conclusion: The order granting full credit was set aside, and the matter was sent back for consideration of the unexamined claim under the relevant exclusion provision.

Ratio Decidendi: Cenvat or Modvat credit on inputs used for generation of electricity or steam is admissible only to the extent the resulting electricity or steam is used within the factory of production; the portion cleared outside the factory does not qualify for credit.

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