Modvat credit on captive power fuel for factory electricity turned on conflicting Tribunal views and Larger Bench reference

Eligibility of Modvat credit on low sulphur heavy stock and furnace oil used in diesel generating sets to produce electricity for captive use in caustic soda manufacture was examined under Rule 57A. The analysis noted that Tribunal decisions had diverged: one line allowed credit where electricity generated within the factory was used in manufacture, while another rejected it unless technical integrality with the manufacturing process was shown. In view of the conflicting interpretations and the significance of the 1995 amendment expressly referring to inputs used for generation of electricity, the issue was considered appropriate for authoritative determination by a Larger Bench.

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Issues: Whether Modvat credit on low sulphur heavy stock and furnace oil used in diesel generating sets for generating electricity, which was in turn used in the manufacture of caustic soda, was admissible under the relevant excise rules; and whether the divergence in Tribunal decisions on the point required reference to a Larger Bench.

Analysis: The dispute centered on the eligibility of fuel oil used for captive power generation as an input under Rule 57A and the effect of the 1995 amendment introducing an express reference to inputs used for generation of electricity. Competing Tribunal decisions were noticed, one line supporting admissibility where electricity generated within the factory was used in manufacture, and another denying credit on the footing that power generation was not part of the manufacturing process unless technical integrality was shown. Owing to the inconsistency in the decisions and the importance of the issue, the matter was considered fit for authoritative resolution by a Larger Bench.

Outcome: The question was referred to a Larger Bench of the Tribunal.

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