Modvat credit on expansion-linked power plant capital goods allowed despite temporary sale of surplus electricity.

Modvat credit on capital goods used in a power plant was held admissible where the plant formed part of a phased expansion project and the assessee's enhanced manufacturing capacity would arise on completion of the project. The Tribunal applied Rule 57R(1) but rejected denial of credit merely because the project was still under implementation and surplus electricity was presently sold outside the factory. Following Bhaskar Industries, it treated the capital goods as being used for eventual manufacture of dutiable final products, so temporary sale of power did not defeat credit eligibility.

---

---

Issues: Whether Modvat credit on capital goods used in the power plant was admissible when the plant formed part of a phased expansion project and the electricity generated was presently sold outside the factory.

Analysis: Rule 57R(1) of the Central Excise Rules, 1944 was invoked to deny credit on the ground that the power plant was used for generation of electricity, which was not excisable, and that surplus power was being sold. The Tribunal accepted that the assessee was undertaking expansion in phases and that the installed capacity of the plant and machinery for manufacture of sponge iron, steel and ferro alloy would be achieved only upon completion of the project. Following the earlier decision in Bhaskar Industries, the Tribunal held that credit cannot be denied merely because, at the stage when the credit was taken, the project was still under implementation and the enhanced power requirement would arise on commencement of full production.

Conclusion: Modvat credit on the capital goods was admissible, and the Revenue's objection based on present surplus sale of electricity was rejected.

Ratio Decidendi: Where capital goods are installed as part of a phased industrial expansion and are required for the eventual manufacture of dutiable final products, Modvat credit cannot be denied merely because the project has not yet reached full capacity or because surplus electricity is temporarily sold outside.

---