Modvat credit on fuel used for captive power generation was upheld as integral to manufacture.

Modvat credit was considered admissible on Residual Fuel Oil and Low Density Oil used as fuel in diesel generating sets to produce electricity for running electric arc furnaces and other manufacturing operations. Rule 57A was read broadly to cover inputs used in or in relation to manufacture, and the later Explanation adding inputs used as fuel was treated as clarificatory rather than restrictive. Because the electricity generated was an intermediary product essential to production, and the oils were also used directly at stages of manufacture, denial of credit on the ground that electricity was not the final excisable product was not accepted. The disallowance was therefore unsustainable.

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Issues: Whether Modvat credit was admissible on Residual Fuel Oil and Low Density Oil used as fuel in diesel generating sets to generate electricity for running electric arc furnaces and other manufacturing operations, and whether the amendment introducing inputs used as fuel was clarificatory.

Analysis: Rule 57A allowed credit on inputs used in or in relation to the manufacture of final products, and the Explanation added by Notification No. 4/94 specifically included inputs used as fuel. The oils were used to operate generating sets, the electricity so produced was an intermediary product essential for running the furnace and rolling mills, and the same fuels were also used directly in furnaces at stages of production. The expression used in or in relation to manufacture was applied broadly, and the introduction of the further clause was treated as clarificatory rather than restrictive. The denial of credit on the footing that electricity was not an excisable final product was not accepted.

Conclusion: Modvat credit on the oils was admissible, the disallowance was unsustainable, and the assessee succeeded.

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