CENVAT credit on captive power use allowed for manufacturing units, but denied for housing colony consumption; extended limitation upheld.

MODVAT/CENVAT credit on LSHS used to generate electricity was admissible only to the extent the electricity was consumed in a captive manufacturing arrangement. Credit could be retained for electricity wheeled to sister units of the same assessee for manufacture, but was not admissible for the portion used to light the housing colony, as that use was outside the manufacturing chain. The extended period of limitation was also held invocable because the diversion to non-admissible use came to light only on inspection and the Court found suppression of facts with intent to evade duty for that portion.

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Issues: (i) Whether MODVAT or CENVAT credit on LSHS used for generation of electricity could be denied to the extent the electricity and steam were supplied to sister units and the housing colony outside the generating unit. (ii) Whether the extended period of limitation could be invoked for recovery of the credit and penalty.

Issue (i): Whether MODVAT or CENVAT credit on LSHS used for generation of electricity could be denied to the extent the electricity and steam were supplied to sister units and the housing colony outside the generating unit.

Analysis: Rule 57A of the Central Excise Rules, 1944, as amended by Notification No. 11/95, expanded the definition of inputs to include fuel and inputs used for generation of electricity used within the factory of production for manufacture of final products or for any other purpose. The decisive factor was whether the electricity remained part of a captive arrangement linked to manufacturing activity. Credit was held admissible for electricity wheeled to sister units of the same assessee because the factory concept could extend to multiple manufacturing units of the same company and the electricity was used in captive generation and captive consumption. However, electricity used for lighting the housing colony was not used in the manufacture of dutiable final products and fell outside the admissible credit chain.

Conclusion: The denial of credit was not sustainable for electricity supplied to sister units used for manufacture, but was sustainable for the portion used in the housing colony. The issue was therefore answered partly in favour of the assessee and partly against the assessee.

Issue (ii): Whether the extended period of limitation could be invoked for recovery of the credit and penalty.

Analysis: The demand arose after the assessee had transferred electricity to sister units and the housing colony, and the diversion came to light only after inspection. On those facts, the Court found intentional non-disclosure in relation to the inadmissible portion of credit. Section 11A of the Central Excise Act, 1944 therefore permitted invocation of the extended period where suppression of facts with intent to evade duty was established.

Conclusion: The extended period of limitation was rightly invoked, and the issue was decided in favour of the Revenue.

Final Conclusion: The appeals were allowed only to the extent of protecting credit relatable to electricity used for manufacturing in the assessee's sister units, while sustaining denial for the portion attributable to housing colony use and sustaining the extended period demand for that inadmissible portion.

Ratio Decidendi: Credit on fuel used to generate electricity is admissible only to the extent the electricity is used in a captive manufacturing arrangement, whereas electricity used for non-manufacturing purposes remains outside the credit scheme; suppression of the inadmissible diversion justifies the extended limitation under Section 11A.

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