Modvat credit on capital goods in phased manufacturing can depend on eventual dutiable production, not an earlier exempt stage.

Modvat credit on capital goods was treated as available in a phased composite manufacturing project where the unit ultimately produced dutiable processed fabric. The analysis focused on the nature of the unit and the point at which the capital goods became relevant to dutiable manufacture, rather than on the fact that an earlier phase produced exempt grey fabric. Rule 57T was read as requiring declaration and acknowledgement, not prior permission to take credit. The commentary also notes that credit could be availed after production commenced and the factory was registered, while cases involving goods received before any dutiable product emerged were distinguishable.

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Issues: Whether Modvat credit on capital goods could be denied for want of a time limit or on the ground that the final product at the stage of installation was exempt, where the assessee's unit was a composite mill implemented in phases and the final product at the later phase was dutiable.

Analysis: The credit was to be examined with reference to the nature of the unit and the point at which the capital goods became relevant to dutiable manufacture. The capital goods were acquired for a composite project that culminated in the manufacture of processed fabric, which was dutiable. The earlier phase involving grey fabric did not determine the assessee's entitlement forever, because the unit had not completed its final phase. Rule 57T required filing of a declaration and acknowledgement, not prior permission to take credit. The reliance on the administrative circular supported the view that credit could be availed after production commenced and the factory was registered. The facts were distinguishable from cases where no credit was available when the goods were received and the later introduction of a dutiable item could not revive the claim.

Conclusion: The assessee was entitled to avail Modvat credit on the capital goods installed during the second phase when the composite mill reached the third phase and processed fabric became dutiable, and no prior permission was required.

Final Conclusion: The appeal by the Revenue did not succeed, and the order allowing credit in favour of the assessee was sustained.

Ratio Decidendi: In a phased composite manufacturing project, entitlement to Modvat credit on capital goods is determined by the eventual dutiable manufacture of the unit, and credit cannot be denied merely because the goods were installed during an earlier phase when the then-manufactured product was exempt or non-dutiable.

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