MODVAT credit on fuel used for in-factory power generation remains available despite Chapter X duty-free clearances.

MODVAT credit was held admissible on light diesel oil used as fuel for generating electricity within the factory, because Rule 57B allowed credit on fuel inputs and on inputs used for electricity generation. Rule 57C and Rule 57CC did not disqualify such fuel inputs, even where part of the final product was cleared without duty under Chapter X procedure. The absence of separate inventory and accounts under Rule 57CC was therefore not fatal on these facts. On that basis, denial of credit and consequential penalty were stated to be unsustainable.

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Issues: Whether MODVAT credit on light diesel oil used as fuel for generating electricity in the factory was admissible when part of the final product was cleared without payment of duty under Chapter X procedure without maintaining separate inventory and accounts.

Analysis: Rule 57B permitted MODVAT credit on inputs used as fuel and on inputs used for generation of electricity within the factory. Rule 57C and Rule 57CC carved out inputs intended to be used as fuel from the restrictions that otherwise applied where inputs were used in relation to both dutiable and exempt final products. Since the light diesel oil was used as fuel for generating electricity in the respondent's factory, the requirement of maintaining separate inventory and accounts under Rule 57CC did not apply. The fact that part of the sulphuric acid was cleared without payment of duty under Chapter X procedure did not alter the position because the relevant rules did not operate against fuel inputs.

Conclusion: The respondent was entitled to MODVAT credit, and denial of credit and consequential penalty were not sustainable.

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