Modvat credit on fuel for captive electricity allowed only where the power is consumed within the factory.

Inputs used to generate electricity consumed in the factory of production were treated as eligible for Modvat credit, because the Explanation to Rule 57A was construed broadly and the expression "factory of production" was read as the factory where the final product was manufactured. Electricity was also regarded as an intermediate product for Rule 57D purposes, so duty credit remained available on fuel used to produce power consumed in the factory for manufacture or other purposes. Credit was, however, denied where the electricity generated from the fuel was fed into the State grid and not consumed within the factory.

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Issues: Whether natural gas liquid used to generate electricity for use in the factory of production qualified as an input for Modvat credit, and whether electricity could be treated as an intermediate product even when generated outside the factory where the final product was manufactured.

Analysis: The relevant clause in the Explanation to Rule 57A was held to be broad enough to cover inputs used for generation of electricity used within the factory of production for manufacture of final product or for any other purpose. The expression "factory of production" was construed to mean the factory where the final product was manufactured, not the place where electricity was generated. The reasoning adopted the view that the same expression in Rule 57A should bear the same meaning in its different clauses. Electricity was also treated as an intermediate product for the purposes of Rule 57D, and the credit of duty on inputs used to generate electricity consumed in the factory was held to be available. However, fuel used to generate electricity that was not consumed in the factory, but was fed into the State electricity grid, was outside the entitlement.

Conclusion: Credit was admissible on the quantity of fuel used to generate electricity consumed in the appellant's factory, but not on the quantity used to generate electricity supplied to the grid.

Final Conclusion: The appeals were allowed to the extent that Modvat credit was held available only for fuel used to generate electricity consumed in the factory for manufacture or other purposes, with denial of credit for electricity diverted to the grid.

Ratio Decidendi: Inputs used to generate electricity consumed in the factory of production are eligible for Modvat credit, and electricity may be treated as an intermediate product for that purpose; credit is unavailable for electricity not so consumed within the factory.

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