Modvat credit on oils and coolants used in manufacturing machinery was upheld as inputs used in relation to manufacture.

Modvat credit was admissible on lubricating oil, coolants, transformer oil and hydraulic oil used for the effective functioning of machinery in manufacturing. The items were treated as goods used indirectly in or in relation to manufacture under Rule 57A of the Central Excise Rules, 1944, rather than as capital goods under Rule 57Q. The Board circular on transformer oil as an essential coolant supported this treatment, and the same approach was applied to similar consumables used to keep machinery operating properly. The departmental objection was rejected and credit on the disputed items was sustained.

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Issues: Whether Modvat credit was admissible on lubricating oil, coolants, transformer oil and hydraulic oil used in machinery and systems for effective functioning of the manufacturing process.

Analysis: The credit was examined under Rule 57A of the Central Excise Rules, 1944. The items in question were treated as goods used indirectly in or in relation to the manufacture of the finished product, and not as capital goods under Rule 57Q. The reasoning also followed the Board circular clarifying that transformer oil functions as a coolant essential for transformer operation, and that similar treatment applies to hydraulic oil and other lubricants used for proper functioning of machinery.

Conclusion: Modvat credit on the disputed oil and coolant items was held admissible under Rule 57A and the Revenue's objection was rejected.

Final Conclusion: The departmental challenge failed, and the allowance of Modvat credit to the assessee was sustained.

Ratio Decidendi: Consumables such as lubricating oil, coolant, transformer oil and hydraulic oil are eligible for Modvat credit when they are used indirectly in or in relation to manufacture and are not confined to capital goods treatment.

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