Modvat credit on reprocessed returned inputs cannot be denied merely because reprocessing, not manufacture, intervened before final use.

Modvat credit was treated as admissible on reprocessed resins returned as rejected material and later used in manufacturing the final product. The denial was based on the contention that reprocessing of returned inputs was not itself manufacture, but that objection was not sufficient where the record showed the goods were ultimately used as inputs in the manufacture of paints. The text states that the Modvat scheme was satisfied because the inputs were used in or in relation to manufacture, and that credit could not be refused merely because an intervening reprocessing stage occurred.

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Issues: Whether Modvat credit was admissible on reprocessed resins received back as rejected material and subsequently used in the manufacture of the final product.

Analysis: The claim for denial rested on the view that reprocessing of returned inputs was not itself manufacture and that credit could not be allowed on rejected materials brought back for reprocessing. The decisive consideration was that the reprocessed goods were ultimately used as inputs in the manufacture of paints, and the record did not justify sustaining the denial merely on the basis of the reprocessing stage. In such circumstances, the object of the Modvat scheme was satisfied because the goods were used in or in relation to the manufacture of the final product, and the cited authorities supported allowance of credit where the reprocessed inputs were so used.

Conclusion: Modvat credit was admissible; the denial of credit was unsustainable and the assessee succeeded.

Ratio Decidendi: Where returned and reprocessed inputs are ultimately used in the manufacture of the final product, Modvat credit cannot be denied merely because the intervening activity is reprocessing and not manufacture.

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