Cenvat credit on capital goods used during trial production was upheld when the machinery later served dutiable manufacture.

Cenvat credit on capital goods was treated as admissible where the machinery was first used on a trial basis to produce exempt granules and was later deployed for manufacture linked to dutiable goods. The lower appellate authority and the Tribunal accepted that factual distinction and distinguished the contrary precedent on that basis. The Gujarat HC held that the Revenue did not raise any substantial question of law against that approach, and the credit rules did not impose the absolute bar urged by the Revenue. The Tribunal's order was therefore sustained in favour of the assessee.

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Issues: Whether the Revenue had raised any substantial question of law against allowance of Cenvat credit on capital goods initially used during a trial period for exempted goods but later used for dutiable manufacture, and whether such credit was barred under the relevant credit rules.

Analysis: The capital goods were found to have been used initially on a trial basis for producing granules that were cleared under exemption, while the manufacturing process was later refined and the machinery was thereafter used for production connected with dutiable goods. On those facts, the lower appellate authority and the Tribunal treated the credit as admissible and distinguished the cited contrary precedent on facts. The Court accepted that distinction and held that the case did not attract the absolute bar contended for by the Revenue under the credit rules.

Conclusion: The issue was decided against the Revenue and in favour of the assessee; no substantial question of law arose from the Tribunal's order.

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