Broad construction of capital goods under Rule 57Q supports Modvat credit for manufacturing inputs and accessories.

Rule 57Q was construed broadly to give the term "capital goods" a beneficial, functional meaning, covering plant, machinery, tools, appliances, parts, components and accessories used in manufacture of final products. The provision was not confined to items that directly bring about a change in substance; functional use in the manufacturing process was sufficient. Earlier Larger Bench rulings and the Supreme Court's affirmation were followed, and later notifications were treated as not affecting the relevant period. On that basis, the disputed items were held to qualify as capital goods and denial of Modvat credit was unsustainable.

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Issues: Whether the disputed items were eligible as capital goods for Modvat credit under Rule 57Q.

Analysis: The items were examined in the light of the wide and beneficial scope of the definition of capital goods under Rule 57Q. The reasoning accepted that the expression included plant, machine, tools, appliances, parts, components and accessories used in the manufacture of final products, and that the coverage was not confined to items directly bringing about a change in substance. The earlier Larger Bench rulings and the Supreme Court's affirmation were followed, and the later notifications were treated as not altering the outcome for the relevant period.

Conclusion: The disputed items qualified as capital goods and the denial of Modvat credit was unsustainable, in favour of the assessee.

Ratio Decidendi: Under Rule 57Q, capital goods are to be construed broadly on the basis of their functional use in manufacture, and items falling within the inclusive definition qualify for Modvat credit.

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