Modvat credit for consumable steel shots was allowed as inputs, despite failure to qualify as capital goods.

Steel shots used for cleaning castings were consumed and perished in the manufacturing process, so they did not qualify as capital goods under Rule 57Q of the Central Excise Rules, 1944. The Tribunal nevertheless held that Modvat credit was admissible as inputs under Rule 57A because the goods were used in or in relation to manufacture, even though they were not capital goods. On that basis, the assessee succeeded and the disallowance, interest, and adverse orders were set aside.

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Issues: Whether steel shots used for cleaning castings were eligible for Modvat credit as capital goods or as inputs under the Central Excise Rules, 1944.

Analysis: The disputed item was found to be consumed and perished during the cleaning process. On the facts, the item did not satisfy the description of capital goods under Rule 57Q. However, credit was held to be admissible where the item is used in or in relation to manufacture, irrespective of whether it qualifies as capital goods, under the scheme of Rule 57A and the settled legal position applied by the Tribunal.

Conclusion: The steel shots were not capital goods under Rule 57Q, but Modvat credit was admissible as inputs under Rule 57A. The assessee succeeded and the disallowance, interest and adverse orders were set aside.

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