Capital goods credit on pollution-control units upheld where exempt sulphur was only an incidental by-product of diesel manufacture.

Capital goods credit was held admissible on the Sulphur Recovery Unit and Standby Sulphur Recovery Unit because they were installed as an integral part of the diesel hydrogen desulphurisation and pollution-control process. The units removed hydrogen sulphide generated during manufacture of high speed diesel, and the sulphur produced was treated as an inevitable by-product rather than the essential product of the plant. Credit was therefore not denied on the ground that the goods were used exclusively for manufacture of exempted sulphur, since their real function was to support production of dutiable diesel meeting prescribed sulphur limits.

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Issues: Whether capital goods credit was admissible on the Sulphur Recovery Unit and Standby Sulphur Recovery Unit used in the diesel desulphurisation process, or whether such goods were used exclusively for manufacture of exempted sulphur.

Analysis: The capital goods were installed pursuant to pollution-control requirements and were functionally connected with the diesel hydrogen desulphurisation plant to remove hydrogen sulphide generated in the process. The sulphur produced was only an inevitable by-product, while the essential use of the units was to enable manufacture of marketable high speed diesel meeting the prescribed sulphur limits. On that footing, the units were not treated as capital goods used exclusively for manufacture of an exempted final product.

Conclusion: Capital goods credit was admissible, and the denial of credit was unsustainable.

Final Conclusion: The appeal succeeded because the disputed units were held to be part of the manufacturing and pollution-control process for dutiable diesel, not machinery used solely for exempt sulphur.

Ratio Decidendi: Where capital goods are installed as an integral and necessary part of a pollution-control linked manufacturing process for a dutiable final product, credit cannot be denied merely because an exempt by-product emerges from that process.

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