Modvat credit on fuel oil for captive steam generation remains admissible despite an exempt intermediate product in manufacture.

Modvat credit on fuel oil used to generate steam was admissible because the fuel oil was a notified input under Rule 57A and the steam formed part of an integrated captive manufacturing process for hardboard. The emergence of an exempted intermediate product did not justify denial of credit where the intermediate product was not cleared as such. Rule 57D(2) supports credit in such circumstances, and captive intermediate goods used within the factory retain their character as intermediate products for Modvat purposes.

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Issues: Whether Modvat credit on fuel oil used for generating steam was admissible when the steam, used captively in the manufacture of hardboard, was itself an exempted intermediate product.

Analysis: The fuel oil had been notified as an eligible input under Rule 57A. The use of steam in the manufacture of the final product was not disputed, and the process of generating steam formed an integral part of the overall manufacturing process. Where an input is used in an integrated manufacturing stream, the process is to be viewed as a whole, and the mere emergence of an exempted intermediate product does not attract denial of credit if the intermediate product is not cleared as such. Rule 57D(2) supports availability of credit even where an intermediate product is exempted. The reasoning also accords with the view that captive intermediate goods used within the factory retain their character as intermediate products for Modvat purposes.

Conclusion: Modvat credit on the fuel oil was admissible and the denial of credit was unsustainable.

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