Modvat credit on capital goods used in an in-factory research laboratory was held eligible despite no direct production use.

Capital goods installed and used in a research laboratory within the licensed factory premises qualified for Modvat credit under Rule 57Q because they were used in the factory of the manufacturer of the final products. The stated requirement was not a direct or indirect nexus with the actual production process; use within the factory in connection with manufacturing activity was sufficient. Reliance was also placed on a departmental trade notice stating that capital goods used within the factory of production would qualify for credit even if not directly used in manufacture. On that basis, denial of Modvat credit was unsustainable.

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Issues: Whether capital goods installed and used in a research laboratory situated within the licensed factory premises were eligible for Modvat credit under Rule 57Q of the Central Excise Rules, 1944, notwithstanding that they were not directly used in the manufacture of the final products.

Analysis: The applicable definition of capital goods under Rule 57Q required the specified goods to be used in the factory of the manufacturer of the final products. The laboratory was situated within the factory premises and the goods were used there in connection with the manufacturing activity. The requirement was not that the capital goods must have a direct or indirect nexus with the actual production process of the final products. Support was also drawn from the departmental trade notice clarifying that capital goods used within the factory of production would qualify for credit even if not directly used in manufacture.

Conclusion: The capital goods were eligible for Modvat credit and the denial of credit was unsustainable.

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