Fuel exception preserves Modvat credit where furnace oil is used only as fuel, despite mixed clearances of goods.

Modvat credit on furnace oil used only as fuel remained admissible even though the assessee manufactured both dutiable and exempted goods without maintaining separate accounts or reversing 8% under Rule 57CC. The court noted that Rules 57C(2) and 57CC(1) and (9) apply a separate inventory and reversal mechanism to common inputs used in both classes of final products, but Rule 57C(3) expressly excludes inputs intended for use as fuel. On the admitted facts, furnace oil fell within that fuel exception, so the separate-account and reversal requirements did not apply and the credit was allowed.

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Issues: Whether Modvat credit on furnace oil used as fuel was admissible when the input was used in the manufacture of both dutiable and exempted goods and no separate accounts were maintained nor 8% amount reversed.

Analysis: Rule 57C(2) and Rule 57CC(1) and (9) of the Central Excise Rules, 1944 require compliance with the separate inventory and reversal mechanism where common inputs are used for dutiable and exempted final products. However, the express language of Rule 57C(3) excludes inputs intended to be used as fuel from the operation of Rule 57CC. On the admitted finding that furnace oil was used only as fuel, the requirement to maintain separate accounts or reverse 8% did not apply.

Conclusion: The credit was admissible and the question was answered against the Revenue and in favour of the assessee.

Final Conclusion: The appeal failed because the fuel exception protected the assessee's entitlement to Modvat credit despite mixed clearances of dutiable and exempted goods.

Ratio Decidendi: Inputs intended to be used as fuel are outside the mischief of the separate-account and 8% reversal requirements governing common inputs used for both dutiable and exempted final products.

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