Modvat credit on capital goods used for intermediate tools is admissible when the final product is dutiable.

Modvat credit on capital goods used to make intermediate tools was admissible where those tools were captively consumed in producing dutiable final products. The Revenue did not dispute that the intermediate tools were used in the manufacture of dutiable final goods, and the operative principle was that exemption of the intermediate product does not defeat credit on the capital goods used in its manufacture when the final product is dutiable. On that basis, the credit was held admissible and the denial was set aside.

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Issues: Whether Modvat credit on capital goods used in the manufacture of tools was admissible when the tools were captively used for manufacture of dutiable final products.

Analysis: The capital goods were used in the manufacture of intermediate tools, and the Revenue did not dispute that such tools were used in the manufacture of dutiable final products. The decision turned on the principle that capital goods employed in the manufacture of intermediate products are eligible for Modvat credit where the final product is dutiable, even if the intermediate product is exempt.

Conclusion: The credit was admissible and the impugned order was not sustainable.

Final Conclusion: The appeal succeeded and the denial of Modvat credit was set aside.

Ratio Decidendi: Modvat credit on capital goods is allowable where those goods are used in the manufacture of intermediate goods that are consumed in producing dutiable final products, notwithstanding exemption of the intermediate goods.

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