Modvat credit on capital goods remains intact despite later repairs and insurance reimbursement of repair costs.

Modvat credit on capital goods was treated as separate from later repair transactions. A diesel engine received in the factory qualified for credit under Rule 57Q, and subsequent repairs, including insurer reimbursement of repair costs and duty on spare parts, did not change the character of the original capital-goods purchase or justify reduction of credit on the engine itself. The credit claim related only to the duty originally paid on the capital goods, not to the later repair inputs. The reasoning also distinguished the cited damaged-goods precedent as inapplicable on these facts, and the full credit on the diesel engine was upheld.

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Issues: Whether Modvat credit on the duty paid on a diesel engine received as capital goods could be denied or reduced because the engine was later repaired, the repair cost was met through insurance, and duty was paid on spare parts used for repair.

Analysis: The diesel engine was received in the factory as capital goods and was eligible for Modvat credit under Rule 57Q of the Central Excise Rules. The duty paid on that engine was a distinct element from the subsequent repair activity. The fact that the engine was later repaired under Rule 173H and the repair cost, including duty on spare parts, was reimbursed by the insurer did not alter the character of the original purchase or justify denial of credit on the engine itself. The credit claimed was not in respect of the spare parts duty but only the duty originally paid on the capital goods. The cited decision dealing with damaged goods did not govern the present facts.

Conclusion: The assessee was entitled to Modvat credit of the full duty of Rs. 43,02,885 paid on the diesel engine, and the reduction of credit was unsustainable.

Final Conclusion: The assessee's claim for Modvat credit on the capital goods was accepted in full, and the Revenue's challenge failed.

Ratio Decidendi: Modvat credit on capital goods cannot be denied merely because the goods were subsequently repaired or the repair expenses were reimbursed by insurance, since the original purchase of capital goods and later repair are separate transactions.

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