CENVAT credit on naphtha-based electricity is confined to captive factory use, not power wheeled out and sold externally.

Naphtha used to generate electricity qualified as CENVAT "input" only when the electricity was used in or in relation to manufacture within the factory. The Supreme Court read Rule 2(g) of the CENVAT Credit Rules, 2002, and Rule 2(k) of the 2004 Rules as requiring a real nexus with manufacture, so the inclusive part could not operate independently. Credit was therefore admissible only for electricity captively consumed in the factory, and not for electricity wheeled out or sold to third parties; Rule 6 also supported denial to that extent.

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Issues: Whether naphtha used as fuel for generating electricity qualified as "input" for CENVAT credit where a part of the electricity generated was wheeled out and sold outside the factory.

Analysis: The definition of "input" under Rule 2(g) of the CENVAT Credit Rules, 2002, and the corresponding Rule 2(k) of the CENVAT Credit Rules, 2004, had to be read as a whole. The substantive part required the goods to be used in or in relation to the manufacture of final products, and the inclusive part did not operate independently of that requirement. Inputs used for generation of electricity could qualify only when the electricity was used within the factory for manufacture or other factory purposes. Where electricity was generated captively, the nexus with manufacture was maintained; but where excess electricity was cleared outside the factory to joint ventures, vendors or the grid for a price, the process and use test failed to that extent. The restrictions in Rule 6 also supported denial of credit on quantities attributable to exempt or non-eligible use.

Conclusion: CENVAT credit was admissible only to the extent the electricity generated from the naphtha was used captively within the factory, and not to the extent of electricity wheeled out and sold outside; the appeal therefore failed.

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