Modvat credit on water-treatment chemicals allowed for manufacturing use, but denied to the extent electricity served office and township needs.

Chemicals used for purification and demineralisation of water qualify as Modvatable inputs where the treated water is used to generate steam and electricity for manufacture of iron and steel products. The Tribunal applied earlier decisions under Rule 57A to hold that the treatment chemicals had sufficient nexus with the manufacturing process. However, Modvat credit is not admissible to the extent the electricity generated from such water is diverted to office and township use, and the exact disallowance must be quantified by the original authority.

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Issues: (i) Whether chemicals used for purification and demineralisation of water, which is subsequently used for generation of steam and electricity for manufacture, were eligible inputs for Modvat credit. (ii) Whether Modvat credit was unavailable to the extent the electricity generated from such water was used in the office and township premises, and the matter required quantification.

Issue (i): Whether chemicals used for purification and demineralisation of water, which is subsequently used for generation of steam and electricity for manufacture, were eligible inputs for Modvat credit.

Analysis: The chemicals were used in the treatment of water that was further employed for producing steam and electricity, which supported manufacture of iron and steel products. The issue was covered by earlier Tribunal decisions extending Modvat benefit to chemicals used for purification treatment and demineralisation of water under Rule 57A of the Central Excise Rules.

Conclusion: The chemicals were held to be eligible Modvatable inputs.

Issue (ii): Whether Modvat credit was unavailable to the extent the electricity generated from such water was used in the office and township premises, and the matter required quantification.

Analysis: A part of the electricity generated was used for office and township purposes. Credit was therefore not admissible in respect of the chemicals relatable to the generation of such electricity. The precise extent of ineligibility had to be worked out by the original authority.

Conclusion: The benefit was denied to that extent and the matter was remanded for quantification.

Final Conclusion: The assessee succeeded on the principal eligibility of Modvat credit, but relief was restricted to exclude the portion attributable to electricity used for non-manufacturing purposes, with quantification left to the original authority.

Ratio Decidendi: Chemicals used in treating water for generation of steam and electricity employed in manufacture qualify as inputs for Modvat credit, but credit is not admissible to the extent the resulting electricity is used for non-manufacturing purposes.

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