Modvat credit on capital goods survives for exempt intermediate products where specification as a final product is not mandatory.

Rule 57R(2) protected Modvat credit on capital goods used to manufacture an exempted or nil-duty intermediate product, and the proviso requiring the intermediate product to be specified as a final product under Rule 57Q was treated as non-mandatory. Applying the beneficial construction earlier given to Rule 57D(2), the absence of specification of grey fabric as a final product did not defeat substantive credit entitlement. The denial of Modvat credit on capital goods used in such manufacture was therefore unsustainable.

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Issues: Whether Modvat credit on capital goods used to manufacture an exempted intermediate product could be denied merely because that intermediate product was not specified as a final product under the relevant rule.

Analysis: Rule 57R(2) protected credit on capital goods used for manufacture of intermediate products even when such products were exempt or chargeable to nil duty. The proviso invoked by the Revenue required the intermediate product to be specified as a final product under Rule 57Q, but the rule was treated as analogous to Rule 57D(2), which had earlier been construed as a beneficial provision and not as imposing a mandatory exclusion. On that reasoning, the absence of specification of grey fabric as a final product could not defeat the substantive entitlement to credit on capital goods used in its manufacture.

Conclusion: The requirement of specification of the intermediate product as a final product was not mandatory, and the denial of Modvat credit was unsustainable.

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