Modvat credit on spares before installation is not barred, and penalty based on that premise cannot stand.

Rule 57Q(2)(ii) does not bar Modvat credit on capital goods before installation where the goods are components, spares or accessories. On the facts, the items were treated as spares, so the restriction on pre-installation credit did not apply. Because the demand and penalty were founded on the incorrect premise that credit was unavailable until installation, the basis of the proceedings failed. The penalty was therefore not sustainable, and consequential relief followed.

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Issues: Whether Modvat credit on capital goods claimed before installation was barred where the goods were in the nature of spares, components or accessories, and whether penalty under the Central Excise Rules, 1944 was sustainable.

Analysis: Rule 57Q(2)(ii) excludes components, spares and accessories from the prohibition against taking credit before installation. On the facts, the goods in question were treated as spares and therefore did not attract the restriction. As the demand and penalty proceeded on the premise that credit was impermissible until installation, the foundation of the proceedings was erroneous.

Conclusion: The penalty was not sustainable and the appeal was allowed with consequential relief.

Final Conclusion: Credit could not be denied on the ground of non-installation where the goods were spares, and the consequential penalty proceedings failed.

Ratio Decidendi: Rule 57Q(2)(ii) does not prohibit Modvat credit on components, spares and accessories before installation, and proceedings based on the contrary premise cannot stand.

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