Modvat credit on steam-generation chemicals depends on manufacturing nexus; power-generation use falls outside eligibility and extended limitation is unavailable.

Chemicals used to demineralise water for steam generation were stated to qualify for Modvat credit only to the extent the resulting steam was directly used in manufacturing operations; credit was not available for the portion of steam diverted to turbines for power generation because that use lacked the requisite manufacturing nexus. The note also states that, where declarations disclosed the use of inputs for steam generation in manufacture, no suppression was made out and the extended limitation period could not be invoked, so any demand for reversal had to be confined to the normal six-month period. Factual verification of the steam-use split was required for quantification.

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Issues: (i) Whether chemicals used for demineralisation of water for generation of steam qualified for Modvat credit when the steam was used partly in manufacturing processes and partly in turbines for power generation; (ii) Whether the demand for reversal of credit could be sustained beyond the normal limitation period in the absence of suppression.

Issue (i): Whether chemicals used for demineralisation of water for generation of steam qualified for Modvat credit when the steam was used partly in manufacturing processes and partly in turbines for power generation.

Analysis: The relevant test was whether the inputs had a nexus with the manufacture of the final products. Chemicals used to treat water for producing steam directly employed in processes such as filtration, distillation, evaporation and other stages of manufacture had the requisite nexus. However, where steam was consumed in the turbine for power generation, the chemicals used for producing that steam were linked to generation of motive power and not to the manufacturing process itself. Since the record did not clearly show the proportion of steam used for each purpose, the matter required factual verification.

Conclusion: Modvat credit was admissible only to the extent the chemicals related to steam directly used in manufacturing processes, and not to the extent they related to steam used in the turbine for power generation.

Issue (ii): Whether the demand for reversal of credit could be sustained beyond the normal limitation period in the absence of suppression.

Analysis: The declarations disclosed that the inputs were used for generation of steam for further use in manufacture. On that basis, no suppression or deliberate withholding of facts was made out so as to justify invocation of the extended period. The demand therefore had to be confined to the normal limitation period.

Conclusion: The demand for reversal of credit was restricted to six months prior to the notice and the extended period was not available.

Final Conclusion: The matter was sent back for quantification of demand and allowance of credit on the portion of steam directly used in manufacture, while restricting any demand relating to turbine use to the normal period of limitation.

Ratio Decidendi: Inputs used in generating an intermediate product are eligible only to the extent that the intermediate product is directly and integrally used in the manufacturing process; where the intermediate product is diverted to power generation, the nexus with manufacture is broken for that portion.

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