Modvat credit for testing inputs upheld where polypropylene and HDPE were used in manufacture-related trial runs of extrusion machines.

Polypropylene and HDPE used for testing and trial of plastic extrusion machines were treated as eligible inputs for Modvat credit under Rule 57A. The expression "used in relation to the manufacture" was applied broadly to include goods used in activities integrally connected with manufacture, and the input need not form part of the finished product. Because testing was necessary to complete the machines to customer specifications before they were treated as fully manufactured, denial of Modvat credit was unsustainable.

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Issues: Whether polypropylene and HDPE used for testing and trial of plastic extrusion machines were eligible inputs for Modvat credit under Rule 57A.

Analysis: The machines were found to be treated as not fully manufactured until testing was completed and the final specifications were set, with entry in the statutory register made only thereafter. The expression "used in relation to the manufacture" in Rule 57A was applied in its expanded sense, consistent with the settled position that an input need not be physically contained in the finished product. Goods used in an activity connected with or pertaining to manufacture, including testing necessary to complete the product to customer specifications, fall within the scope of inputs for Modvat purposes.

Conclusion: Polypropylene and HDPE used for testing the machines were eligible inputs, and the denial of Modvat credit was unsustainable.

Ratio Decidendi: The phrase "in relation to the manufacture" in Rule 57A enlarges the concept of inputs to include goods used in activities integrally connected with manufacture, even if they do not form part of the final product.

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