Modvat credit on capital goods upheld where non-marketable intermediate cotton was not excisable and final yarn manufacture was dutiable.

Capital goods used in the manufacture of cotton yarn could not be denied Modvat credit merely because combed/carded cotton emerged as an intermediate product and was not specified as a final product under the capital goods rule. The intermediate product was found to be non-marketable and therefore not excisable, so the machinery was treated as used in producing the dutiable final product, cotton yarn. The proviso to Rule 57R(2) applied only where an excisable intermediate product arose in the course of manufacture. Credit was therefore admissible, and the denial was unjustified.

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Issues: Whether capital goods credit under the Modvat scheme could be denied on machinery used in the manufacture of cotton yarn on the ground that the intermediate product, combed/carded cotton, was not specified as a final product under Rule 57Q(1), thereby attracting the proviso to Rule 57R(2).

Analysis: The machinery in question was used for manufacturing cotton yarn. The intermediate product, combed/carded cotton, was found to be non-marketable and hence not excisable. In such a situation, the capital goods were to be treated as used in the manufacture of the dutiable final product, namely cotton yarn, and not in the manufacture of an excisable intermediate product. Rule 57R(2) applied only where an excisable intermediate product emerged during the course of manufacture of the final product. The later specification of combed/carded cotton as a final product under Rule 57Q(1) did not affect the assessee's entitlement to credit for the machinery already used in the manufacture of cotton yarn.

Conclusion: The denial of Modvat credit on the capital goods was unjustified and the assessee was entitled to the credit.

Ratio Decidendi: Where intermediate goods arising in the course of manufacture are not marketable and hence not excisable, capital goods used for producing the dutiable final product cannot be denied Modvat credit merely because the intermediate goods were not specified as final products under the relevant capital goods rule.

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