Modvat credit on carding machine parts upheld where an intermediate sliver was captively used to make dutiable cotton yarn.

Modvat credit was admissible on parts of carding machinery used in the manufacture of sliver, because Rule 57R(2) protects credit on capital goods used in the overall process for a dutiable final product and does not deny credit merely because an intermediate product emerges during manufacture. The fact that the sliver was captively consumed in producing dutiable cotton yarn did not defeat eligibility. A Board circular and an earlier Bench view supported this approach, so the Revenue's challenge failed.

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Issues: Whether Modvat credit is admissible on parts of carding machinery used in the manufacture of sliver, an intermediate product, when the sliver is captively consumed in the manufacture of dutiable cotton yarn.

Analysis: The dispute turned on the character and use of the impugned items as parts of the carding machine and on the admissibility of Modvat credit where an intermediate product emerges in the course of manufacture of the final dutiable product. Rule 57R(2) protects credit on capital goods from being denied merely because an intermediate product comes into existence during manufacture of the final product. The settled position applied in the earlier Bench decision was that credit cannot be denied where the capital goods are used in the overall process leading to a dutiable final product, and the emergence of an intermediate product does not defeat eligibility. The Board circular relied upon also clarified that credit should not be denied on capital goods used in the manufacture of exempt intermediate products used captively for dutiable finished goods.

Conclusion: Modvat credit on the parts of the carding machine was admissible, and the Revenue's appeal failed.

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