Modvat credit on duty-paid components of exempt capital goods was allowed where the plant served factory operations.

Modvat credit was admissible on duty-paid components used to manufacture a Diesel Generating Power Plant installed in the factory, even though the completed plant was exempt from duty. The plant functioned as capital goods for running the manufacturing unit during power cuts, and Rule 57Q covered duty-paid capital goods as well as their components, spares and accessories. Exemption of the finished plant did not bar credit on duty-paid inputs used in its manufacture. The reference was answered against the Revenue, and credit was held allowable in favour of the manufacturer.

---

---

Issues: Whether Modvat credit was admissible on the components of a Diesel Generating Power Plant installed in the factory when the plant itself was exempt from duty.

Analysis: The plant formed part of the factory and functioned as capital goods used for running the manufacturing unit during power cuts. Duty had been paid on some of its components, and Rule 57Q permitted credit on duty paid on capital goods and on their components, spares and accessories. The fact that the completed plant was exempt from duty did not bar credit on duty paid inputs used in its manufacture.

Conclusion: Modvat credit was admissible on the components of the Diesel Generating Power Plant, and the questions were answered against the Revenue.

Final Conclusion: The reference failed and was dismissed, with the legal position settled in favour of the manufacturer on admissibility of credit for duty paid components used in exempt capital goods.

Ratio Decidendi: Where duty has been paid on components used in the manufacture of capital goods forming part of the factory, Modvat credit is allowable even if the completed capital goods are themselves exempt from duty.

---