Exemption for integral power-project components upheld where insulation materials formed essential parts of furnace operation.

Ceramic fibre board and ceramic fibre twisted rope used as furnace insulation in a power project qualified for exemption because they formed an essential, integral part of the initial setting-up and functioning of the project as machinery, auxiliary equipment or components. Their lack of direct electricity-generation function did not defeat eligibility where they enabled heat control, safety and boiler operation. The denial of Notification No. 33/2005-CE benefit was therefore unsustainable, and the associated demand, interest and penalties could not be sustained.

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Issues: Whether ceramic fiber board and ceramic fiber twisted rope used as insulating materials for a furnace in a power project were eligible for exemption under Notification No. 33/2005-CE dated 08.09.2005.

Analysis: The exemption covered items of machinery, auxiliary equipment and components required for initial setting-up of a project for generation of power using non-conventional materials. The goods in question were used for insulation of the furnace, which enabled control of heat, ensured safety around the furnace and formed an essential part of the boiler. The absence of a direct role in generating electricity did not by itself defeat eligibility when the goods were integral to the project setup and its functioning.

Conclusion: The goods were held eligible for exemption, and the denial of the benefit was unsustainable.

Final Conclusion: The demand, interest and penalties could not be sustained, and the assessee succeeded in the appeal with consequential relief.

Ratio Decidendi: Goods that are essential components of the initial setting-up of a power project and are integrally connected with its operation qualify for exemption even if they do not directly generate power.

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