Capital goods for captive power generation qualify for Modvat Credit when electricity is substantially used in manufacturing.

Capital goods used to erect a power plant qualified for Modvat Credit under Rule 57Q where the electricity generated was substantially captively consumed in the assessee's factory for manufacture of final products, with only a small surplus sold outside. The governing principle applied was that inputs or capital goods used to generate electricity captively consumed in manufacturing are used "in relation to manufacture," supporting credit eligibility. The Revenue's objection would have had force only if the electricity were not in substance captively consumed. Modvat Credit was therefore admissible.

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Issues: Whether Modvat Credit was admissible on capital goods used in the erection of a power plant for generation of electricity that was predominantly captively consumed in the assessee's factory, notwithstanding some surplus electricity being sold outside.

Analysis: The claim for credit was examined in the context of Rule 57Q of the Central Excise Rules, 1944. The electricity generated from the power plant was found to be mostly consumed within the factory for manufacture of the final product, with only a small surplus being sold. The Court also noted the principle enunciated by the Supreme Court that where inputs are used to generate electricity captively consumed in manufacture, the expression "used in relation to the manufacture" supports availment of credit. The Revenue's contention would have had force only if the electricity had not been captively consumed but sold outside in substance.

Conclusion: Modvat Credit on the capital goods was held to be admissible, and the Revenue's challenge failed.

Ratio Decidendi: Where capital goods are used for generation of electricity that is substantially captively consumed in the manufacture of final products, they qualify for Modvat Credit as being used in relation to manufacture.

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