Modvat credit on pre-1996 capital goods was allowed even before new production began under Rule 57Q.

Modvat credit on capital goods received in the factory before 01-01-1996 was admissible under Rule 57Q even though manufacture of the new final product had not yet commenced. The Board's clarificatory circular of 02-12-1996 was applied to hold that credit could be taken immediately on receipt and utilisation of the capital goods, and not only after actual production began. The restrictive view that credit depended on commencement of float glass production was rejected, making the credit denial, duty demand and penalty unsustainable.

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Issues: Whether Modvat credit on capital goods received in the factory before 01-01-1996 was admissible even though manufacture of the new final product had not commenced.

Analysis: The dispute turned on the interpretation of Rule 57Q of the Central Excise Rules, 1944 and the clarification issued by Circular No. 277/111/96-CX dated 02-12-1996. The circular clarified that, for capital goods procured and received in the factory prior to 01-01-1996, credit of the specified duty was admissible immediately on availment and utilization, even if the goods were not yet put to actual production of excisable goods. The denial of credit was therefore based on an overly restrictive view that the credit could be taken only after commencement of production of float glass. That view could not stand in light of the applicable circular, which was squarely applicable to the facts.

Conclusion: The Modvat credit was admissible to the assessee, and the denial of credit, duty demand, and penalty were unsustainable.

Ratio Decidendi: Where capital goods are received in a factory before 01-01-1996, Modvat credit under Rule 57Q is allowable on the basis of the Board's clarificatory circular even if the new final product has not yet commenced production.

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