Modvat credit on capital goods allowed where intermediate goods were captively used in manufacturing dutiable final products.

Modvat credit on capital goods was held admissible where the goods were used in manufacturing an intermediate product captively consumed in producing dutiable final goods. The court reasoned that credit cannot be denied merely because the intermediate product falls under an excluded heading or is otherwise exempt, so long as the capital goods form part of the manufacture of the final duty-paid product. Applying that principle, the exclusion under Rule 57Q did not bar the claim on the facts, and the Revenue's challenge failed; the Tribunal's order allowing credit was sustained.

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Issues: Whether Modvat credit on capital goods used in the manufacture of intermediate products captively consumed in the production of dutiable final products was admissible even though the relevant heading was specifically excluded under Rule 57Q.

Analysis: The credit claim related to capital goods used in the manufacture of sliver, an intermediate product falling under Chapter Heading 5202 and used captively in the manufacture of cotton yarn. The reasoning applied was that credit on capital goods should not be denied merely because the intermediate product was exempt or specifically excluded, where the goods were used in the chain of manufacture of final products chargeable to duty. The earlier view adopted by the Tribunal and the binding precedents relied upon supported allowance of credit in such circumstances.

Conclusion: The assessee was entitled to Modvat credit on the capital goods, and the exclusion under Rule 57Q did not bar the claim in the facts of the case.

Final Conclusion: The Revenue's challenge failed and the Tribunal's order allowing the credit was sustained.

Ratio Decidendi: Modvat credit on capital goods cannot be denied solely because they are used for manufacturing intermediate exempt products when those products are captively consumed in the manufacture of dutiable final goods.

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