Fuel credit on LSHS allowed where steam was used in-factory, despite part of generated electricity being supplied outside.

Modvat/Cenvat credit on LSHS used as fuel to generate steam within the factory was admissible where that steam was itself used in manufacture and for electricity generation inside the plant. Rule 57B, rather than the recovery provisions relied on by the department, governed entitlement to credit on fuel. The fact that some electricity generated from the steam was supplied outside the factory to the township and the electricity board did not defeat credit, because the decisive use of the fuel was within the factory for production-related purposes. On that basis, the duty demand and penalty could not be sustained.

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Issues: Whether Modvat/Cenvat credit on LSHS, used as fuel for generating steam within the factory and thereafter used in manufacture and electricity generation, could be denied on the footing that part of the electricity was supplied outside the factory.

Analysis: The demand was sought to be recovered under Rule 57AH of the Central Excise Rules, 1944 and Rule 8 of the Cenvat Credit Rules, 2001, but the decisive provision was Rule 57B governing credit on fuels. Credit on fuel was permissible so long as the fuel was used in the manufacture of steam utilised in the factory. The record showed that steam was generated and used within the factory for manufacture of fertilizers and chemicals and for generation of electricity. Once the steam was so used within the plant, the fact that some electricity was supplied to the township and the electricity board did not alter the entitlement to credit.

Conclusion: The credit on LSHS was admissible and the duty demand and penalty could not be sustained.

Ratio Decidendi: Where fuel is used to generate steam that is used within the factory, Modvat/Cenvat credit cannot be denied merely because electricity generated from that steam is partly supplied outside the factory.

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