Modvat credit on capital goods cannot be denied merely because intermediate products emerge during integrated manufacturing.

Modvat credit on eligible capital goods cannot be denied merely because the manufacturing process in an integrated plant also yields intermediate products such as oxygen and nitrogen gases. Where the capital goods are declared and are used in the manufacture of the final product, the incidental emergence of intermediate goods does not by itself disqualify the credit. The composite nature of the plant does not alter this principle. On that basis, denial of Modvat credit was held unsustainable and the credit was admissible.

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Issues: Whether Modvat credit on capital goods could be denied merely because the capital goods were used in an integrated plant that generated intermediate products, namely oxygen and nitrogen gases, before emergence of the final products.

Analysis: The appeal turned on the scope of credit on capital goods under the Modvat scheme. The record showed that the capital goods and the final products were declared, and the dispute was confined to the fact that the plant also produced intermediate gases in the course of manufacture. The governing principle applied was that credit on eligible capital goods cannot be denied merely because intermediate products come into existence during the manufacturing process, so long as the goods are used in the manufacture of the final product. The existence of an integrated or composite plant did not alter this position.

Conclusion: The denial of Modvat credit was unsustainable and the credit was admissible. The issue is decided in favour of the assessee.

Ratio Decidendi: Credit on eligible capital goods cannot be refused solely because the manufacturing process yields intermediate products, if the capital goods are used in the production of the final products.

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