Testing materials used for customised machines were held part of manufacture, making Modvat credit admissible.

Flexible plastic films and poly paper used in contractual testing of customised machines qualified as inputs used in or in relation to manufacture under Rule 57A of the Central Excise Rules, 1944. The Court treated the testing process as part of manufacture because the machines were built to customer specifications and could not be regarded as complete or marketable until they passed the required testing. As marketability is an attribute of manufacture, and the revenue did not prove that the machines were saleable before testing, Modvat credit was admissible. The High Court's contrary answers were set aside and the appeals were allowed.

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Issues: Whether flexible plastic films and poly paper used for testing customised machines were inputs used in or in relation to the manufacture of the final product so as to qualify for Modvat credit under Rule 57A of the Central Excise Rules, 1944.

Analysis: Rule 57A allowed credit for duty paid on goods used in or in relation to the manufacture of final products, and the expression was meant to widen the scope of "inputs" beyond goods physically contained in the finished product. The testing material was not used after manufacture was complete in a mere quality check; rather, the machines were tailor-made to customer specifications and could not be regarded as complete or marketable until they passed the contractual testing. Marketability being an attribute of manufacture, the absence of proof from the revenue that the assembled machines were saleable before testing meant that the testing process remained part of manufacture. The use of the films and paper was therefore integrally connected with completion of the manufacturing process.

Conclusion: The testing material constituted inputs used in relation to the manufacture of the customised machines, and Modvat credit was admissible in favour of the assessee.

Final Conclusion: The impugned answers of the High Court were unsustainable, and the appeals were allowed by holding that testing of the customised machines formed part of manufacture.

Ratio Decidendi: Where goods are specially manufactured to customer specifications and are not marketable until contractual testing is completed, materials consumed in such testing are inputs used in relation to manufacture for the purpose of Modvat credit.

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