Modvat credit on fuel used to generate captive steam and electricity qualifies despite exemption of the intermediate utilities.

Modvat credit was held admissible on Light Diesel Oil and Furnace Oil used as fuel to generate steam and electricity for captive consumption in manufacturing carbon black. The Tribunal rejected the view that credit must be denied merely because the resulting steam or electricity was exempt, and treated those utilities as integral intermediates in the manufacturing stream. Applying the amended Rule 57A and the settled line of authority, it held that fuel used to produce captively consumed utilities qualifies for input credit. The denial of credit was therefore set aside in favour of the assessee.

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Issues: Whether Modvat credit was admissible on Light Diesel Oil and Furnace Oil used as fuel for generating steam and electricity, where such steam and electricity were captively used in the manufacture of carbon black.

Analysis: The credit was claimed on the inputs LDO and Furnace Oil under Rule 57A as amended by Notification No. 4/94, which permitted inputs used as fuel to qualify for credit. The earlier view denying credit on the footing that steam and electricity were final exempted products was rejected as unsustainable. The use of fuel to produce steam, and steam/electricity in the manufacturing stream of the final product, brought the case within the line of authorities treating such utilities as intermediate and integral to manufacture rather than as disentitling exempt products under Rule 57C. The Tribunal followed the settled view that credit cannot be denied merely because steam or electricity is exempt when they are captively consumed in the manufacturing process.

Conclusion: Modvat credit was admissible and the denial of credit was set aside in favour of the assessee.

Ratio Decidendi: Input credit is allowable where fuel is used to generate steam or electricity that is captively consumed as an integral part of the manufacturing process, even if the intermediate utility so generated is exempt from duty.

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