Modvat credit on capital goods used in manufacture can be allowed without physical use inside the factory premises.

Modvat credit under Rule 57Q was treated as available on capital goods used in cement manufacture even though they were not physically used within the factory premises. The Tribunal applied the Supreme Court's interpretation of input credit principles to capital goods credit, holding that the controlling test was whether the goods were used in or in relation to manufacture of the final product. Since such use was not denied, physical utilisation inside the factory was not regarded as a necessary condition for credit. On that basis, the capital goods credit was held admissible and the Department's challenge failed.

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Issues: Whether Modvat credit under Rule 57Q of the Central Excise Rules, 1944 was admissible on capital goods used in the manufacture of cement even though they were not used within the factory premises.

Analysis: The Tribunal followed the Supreme Court's exposition on Rule 57A and treated the principle governing input credit as applicable, to the limited extent relevant, to capital goods credit as well. The governing consideration was that the goods had been used in the production of the final product and there was no denial of such use. On that basis, the requirement that the inputs or capital goods must be physically utilised within the factory premises was not accepted as a condition for credit where the use was in or in relation to manufacture.

Conclusion: Modvat credit on the capital goods was admissible, and the Department's appeal failed.

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