Proportionate Modvat credit for electricity partly used outside the factory; penalty and interest cannot apply retrospectively.

Modvat credit on a D.G. set installed and used in the factory could not be denied in full merely because part of the electricity generated was supplied to an adjacent unit; the credit had to be restricted proportionately to the electricity diverted outside the factory. Penalty and interest could not be imposed for a period before the relevant penal provisions came into force, so those demands were unsustainable and were set aside.

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Issues: (i) whether Modvat credit on a D.G. set used in the factory could be denied in full merely because part of the electricity generated was supplied to an adjacent unit; (ii) whether penalty and interest could be imposed for a period prior to the insertion of the relevant penal provisions.

Issue (i): Whether Modvat credit on a D.G. set used in the factory could be denied in full merely because part of the electricity generated was supplied to an adjacent unit.

Analysis: The applicable rule permitted credit on capital goods used for generation of electricity used within the factory of production. The expression could not be extended to permit use outside the factory, but the facts showed that the D.G. set was installed in the factory and electricity was used there as well as partly diverted to a neighbouring unit. On that footing, total denial of credit was not warranted. The proper approach was to restrict disallowance to the portion attributable to electricity transferred outside the factory.

Conclusion: Modvat credit was admissible on a proportionate basis, and only the portion relatable to electricity supplied outside the factory was liable to be disallowed.

Issue (ii): Whether penalty and interest could be imposed for a period prior to the insertion of the relevant penal provisions.

Analysis: The credit was taken before the statutory provisions for penalty and interest came into force. In such circumstances, those provisions could not be applied to the earlier period.

Conclusion: Penalty and interest were not sustainable and were set aside.

Final Conclusion: The appeal succeeded in part: the credit dispute was confined to a proportionate disallowance, while the penalty and interest were annulled.

Ratio Decidendi: Where capital goods generating electricity are used within the factory and only a part of the generated electricity is diverted outside, Modvat credit cannot be denied entirely and must be restricted proportionately; penal provisions cannot be applied retrospectively to past credit availment.

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