Input tax credit on captive windmill power upheld where electricity was used solely for manufacturing taxable goods.

A windmill installed outside the factory still qualified as capital goods for input tax credit where the electricity generated was used exclusively in the assessee's own manufacture of taxable goods and was neither commercially sold nor diverted. The Madras HC held that the relevant test was the captive use of the power in the manufacturing process, not the windmill's physical distance from the industrial premises. Applying Section 19(3) of the Tamil Nadu VAT Act and Rule 10(4), the Court treated the windmill as capital goods used in manufacture and held that rejection of input tax credit was unsustainable.

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Issues: Whether a windmill installed outside the industrial premises, but used to generate electricity solely for the assessee's manufacturing activity, qualifies as capital goods so as to entitle the assessee to input tax credit under the Tamil Nadu Value Added Tax Act, 2006 and the Tamil Nadu Value Added Tax Rules, 2007.

Analysis: The power generated by the windmill was admittedly used for manufacturing cotton yarn, a taxable product, and was not commercially exploited or supplied to others. The location of the windmill away from the factory did not break the nexus with the manufacturing process, since the relevant test was whether the electricity generated was used captively for production. The statutory scheme under Section 19(3) of the Tamil Nadu Value Added Tax Act, 2006 permits input tax credit on purchases of capital goods used in the manufacture of taxable goods, and Rule 10(4) regulates the manner and timing of availment. On the facts proved, the windmill was treated as capital goods used for manufacturing activity.

Conclusion: The assessee was entitled to input tax credit on the windmill, and the rejection of the claim was unsustainable.

Ratio Decidendi: Where electricity generated from a windmill is used exclusively for the assessee's own manufacturing of taxable goods and is not commercially sold or diverted, the windmill is treated as capital goods used in manufacture for purposes of input tax credit.

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