Input tax credit on captive electricity generation allowed where power was used as part of manufacturing taxable goods.

Input tax credit was admissible on tax paid for raw materials used to generate electricity where the power was captively consumed as an integral step in manufacturing taxable goods. The Kerala HC read Section 11(5) of the Kerala VAT Act, 2003 as barring credit only when inputs are used in the manufacture of exempted goods, not where electricity is produced for in-house use in the taxable manufacturing process. Since electricity was excluded from the Act's definition of goods, credit was confined to the proportion attributable to manufacturing use, with the portion used for factory illumination excluded and the claim subject to proof of tax payment and supporting documents.

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Issues: Whether input tax credit was admissible on tax paid on raw materials used for generation of electricity, where the electricity was captively consumed in the manufacture of taxable goods and partly for illuminating the factory premises, notwithstanding the exclusion of electricity as an exempted item under Schedule I and the restriction in Section 11(5) of the Kerala Value Added Tax Act, 2003.

Analysis: The decisive consideration was whether generation of electricity, on the facts of the case, formed an integral part of the manufacturing activity. The Court accepted that electricity generation was not an independent commercial end-product for sale, but a captive process anterior to and closely connected with manufacture of newsprint. Section 11(5) was understood as prohibiting credit where the input is used in the manufacture of exempted goods, but not where the electricity generated is itself consumed as an in-house step in producing taxable final goods. The Court also noted that electricity is excluded from the definition of goods under the Act and approved the Tribunal's direction to segregate the proportion attributable to manufacturing use from that used for illumination, with credit confined to the manufacturing component and subject to proof of tax payment and supporting documents.

Conclusion: Input tax credit was allowable to the extent the raw materials were used for generation of electricity consumed in the manufacture of the taxable final product, and the assessee succeeded on the question referred.

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