Capital goods credit for process-control components was allowed where items had direct functional use in manufacturing.

Capital goods credit was treated as admissible for an indicating flow relay and a seal used in a rolling mill because both items had a direct functional role in the manufacturing process. The indicating flow relay monitored acid concentration and flow according to operating parameters, while the seal formed part of the valve arrangement in the pneumatic cylinder controlling oil flow to the rolling equipment. Relying on the functional use of the items and supporting circular and Tribunal precedent, the denial of credit and the associated penalty were held unsustainable.

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Issues: Whether capital goods credit was admissible on the indicating flow relay and seal used in the assessee's rolling mill.

Analysis: The indicating flow relay was used to monitor the concentration and flow of acid according to operational parameters. The seal formed part of the valve arrangement used in the pneumatic cylinder for controlling the flow of oil into the rolling equipment. On the basis of their functional use in the manufacturing process and the supporting circular and Tribunal precedent, both items were treated as eligible for capital goods credit.

Conclusion: Capital goods credit was admissible on both disputed items, and the denial of credit and penalty could not stand.

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