Modvat credit on capital goods remains available when exempt waste emerges only incidentally during manufacture of dutiable goods.

Modvat credit on capital goods remained admissible where the goods were used to manufacture dutiable cotton yarn and exempt waste yarn arose only incidentally as a by-product during the process. Rule 57R barred credit only when capital goods were used exclusively for exempt final products, and Rule 57R(2) protected credit where exempt intermediate products emerged in the course of manufacture. The subsequent amendment by Notification No. 46/97-C.E. (N.T.) did not change that position on these facts. Credit could therefore not be denied merely because an incidental exempt product arose during manufacture.

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Issues: Whether Modvat credit on capital goods was admissible where the capital goods were used for manufacture of dutiable cotton yarn and exempt waste yarn emerged only as a by-product during the relevant period before the amendment introduced by Notification No. 46/97-C.E. (N.T.).

Analysis: The capital goods were installed for manufacture of cotton yarn on which duty was paid. The exempt hard waste did not represent the intended final product but arose incidentally as an entangled mass during the process of manufacture. Under Rule 57R, credit was barred only where capital goods were used exclusively for exempt final products, and Rule 57R(2) further protected credit where exempt intermediate products arose in the course of manufacture. The later amendment by Notification No. 46/97-C.E. (N.T.) did not alter the position so as to deny credit on facts where the capital goods were not used exclusively for exempt production.

Conclusion: Modvat credit on the capital goods was admissible, and the Revenue's challenge failed.

Ratio Decidendi: Where capital goods are used for manufacture of a dutiable final product and the exempt product arises only incidentally as a by-product or intermediate product, credit cannot be denied unless the goods are used exclusively for exempt production.

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