Modvat credit on inputs used to generate steam within the factory remained admissible even for exempt final products.

Modvat credit was admissible on low sulphur heavy stock used to generate steam, because the input remained within the credit scheme even though the steam was used in relation to exempt fertilizer production. Rule 57B(1)(iv) was construed to cover inputs used for generation of steam within the factory, including steam connected with manufacture of final products or other factory use. On that interpretation, the assessee's entitlement to Modvat credit was sustained and the Revenue challenge failed.

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Issues: (i) Whether Modvat credit was admissible on low sulphur heavy stock used for generating steam, where the steam was utilised in the manufacture of fertilizers exempt from excise duty. (ii) Whether Rule 57B(1)(iv) permitted Modvat credit on inputs used for generation of steam used within the factory for manufacture of final products or for any other purpose.

Issue (i): Whether Modvat credit was admissible on low sulphur heavy stock used for generating steam, where the steam was utilised in the manufacture of fertilizers exempt from excise duty.

Analysis: The entitlement to credit depended on whether the input LSHS was covered by the Modvat scheme when it was consumed in the process of generating steam used in production. The governing view, already affirmed in earlier binding decisions, recognised that such use did not take the input outside the credit mechanism merely because the ultimate final product was exempt.

Conclusion: Modvat credit on LSHS was admissible and the finding against the assessee could not be sustained.

Issue (ii): Whether Rule 57B(1)(iv) permitted Modvat credit on inputs used for generation of steam used within the factory for manufacture of final products or for any other purpose.

Analysis: Rule 57B(1)(iv) specifically covered inputs used for generation of electricity or steam. The provision was construed to allow credit where the steam so generated was used within the factory, including use connected with manufacture of final products, and the issue had already been settled in favour of the assessee by the accepted line of authority.

Conclusion: Rule 57B(1)(iv) supported the assessee's entitlement to Modvat credit.

Final Conclusion: The assessee was entitled to Modvat credit on LSHS used for generating steam, and the Revenue's challenge failed.

Ratio Decidendi: Where an input is used to generate steam within the factory, credit is allowable under the Modvat scheme even if the steam is ultimately used in relation to exempt final products, when the relevant rule specifically covers such use.

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