Modvat Credit on Furnace Construction Materials Allowed as Inputs Despite Capital Goods Character

Bricks, refractory materials and jointing cement used to fabricate a furnace within the factory qualified as inputs for Modvat credit under Rule 57-AA because goods used in the manufacture of capital goods further used in the factory were expressly covered by the rule's Explanation 2. The fact that the materials could also answer the description of capital goods did not by itself exclude credit where they were collectively consumed to bring the furnace into existence and the declaration showed factory use in or in relation to manufacture of the final dutiable product. Credit was therefore admissible and denial of Modvat credit and penalty was set aside.

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Issues: Whether bricks, refractory materials and jointing cement used in the fabrication of a furnace within the factory qualified as inputs for Modvat credit, notwithstanding that refractory and refractory materials were also listed under capital goods.

Analysis: Rule 57-AA of the Central Excise Rules, 1944 drew a distinction between capital goods and inputs, and its Explanation 2 specifically included goods used in the manufacture of capital goods that were further used in the factory. The materials in question were procured for fabrication of the furnace, and the assessee had filed the relevant declaration showing that the furnace would be used within the factory in or in relation to manufacture of the final dutiable product. The fact that the materials could individually fall within the description of capital goods did not disqualify them where they were used collectively to bring into existence the furnace itself.

Conclusion: The materials were eligible as inputs and Modvat credit could not be denied. The finding of denial of credit and penalty was set aside in favour of the assessee.

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