Modvat credit on duty-paid spares fitted outside the factory was allowed where the parts formed capital goods components in machinery.

Modvat credit under Rule 57Q was treated as admissible on duty-paid spares used in reconditioning or refurbishing machinery, provided the parts were incorporated into machinery used as capital goods and otherwise satisfied the rule. The fact that the spares were fitted outside the assessee's factory was not considered decisive, because location of fitting alone did not defeat eligibility for credit. The restrictive view denying credit on that ground was rejected, and the assessee was stated to be entitled to consequential relief.

---

---

Issues: Whether Modvat credit under Rule 57Q of the Central Excise Rules, 1944 was admissible on duty-paid spares used by a job worker in reconditioning/refurbishing machinery, even though the spares were fitted outside the assessee's factory.

Analysis: Credit on capital goods is available where duty-paid parts are incorporated into the capital goods and used as such in the manufacturing setup. The mere fact that the parts were fitted in the premises of the refurbisher, and not in the assessee's factory, was held not to be decisive. Rule 57Q was read to permit credit so long as the disputed items constituted capital goods/components used in the machinery that thereafter functioned as capital goods. The restrictive view taken below was rejected.

Conclusion: Modvat credit was admissible to the assessee on the duty paid on the spares used in reconditioning the machinery, and the denial of credit was set aside.

Final Conclusion: The appeal succeeded and the assessee was held entitled to consequential relief in law.

Ratio Decidendi: Modvat credit cannot be denied merely because duty-paid spares/components were fitted outside the assessee's factory, if they were incorporated into machinery used as capital goods and otherwise satisfy Rule 57Q.

---