MODVAT credit on captive intermediate goods upheld where the product had no independent marketability and final yarn was dutiable.

MODVAT credit on capital goods used to manufacture sliver/combed cotton, an intermediate product captively consumed in making dutiable cotton yarn, could not be denied merely because the intermediate heading was excluded under Rule 57Q. The decisive factor was that the intermediate product had no independent marketability or separate commercial existence, and excisability depends on goods being marketable and capable of sale. As the final product was cleared on payment of duty and the capital goods were used in the course of that dutiable manufacture, credit remained admissible. The Revenue's objection was rejected.

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Issues: Whether MODVAT credit on capital goods used for manufacturing sliver/combed cotton, an intermediate product in the manufacture of dutiable cotton yarn, could be denied on the ground that the heading covering such intermediate product stood excluded under Rule 57Q.

Analysis: The goods in question were found to be intermediate products having no independent marketability and no separate commercial existence. The decisive consideration was that excisability depends upon the product being goods known to the market and capable of being bought and sold. Since the final product, cotton yarn, was cleared on payment of duty and the sliver/combed cotton arose only at an intermediate stage for captive use, credit on the capital goods used in its manufacture could not be denied. Support was also drawn from the departmental circular stating that credit should not be denied where capital goods are used to manufacture an exempt intermediate product captively consumed in the manufacture of dutiable finished goods.

Conclusion: The question of law was answered against the Revenue, and MODVAT credit was held admissible to the assessee.

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