Functional use test for capital goods credit allows Modvat credit on equipment integral to manufacture outside factory premises.

Rule 57Q capital goods credit depends on the functional role of the equipment in manufacture, not merely its physical location within the factory. A Single Point Mooring system used to berth vessels and pump raw material through pipelines directly to the tank farm was treated as an integrated and indispensable part of the manufacturing process. On that basis, the system and connected apparatus satisfied the user test as capital goods, and denial of Modvat credit because the system was outside the factory premises was rejected.

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Issues: Whether credit under Rule 57Q of the Central Excise Rules, 1944 was admissible on the Single Point Mooring system treated as capital goods.

Analysis: The definition of capital goods under Rule 57Q extends to machinery, equipment, apparatus, components, spares and accessories used for producing or processing goods or for bringing about a change in any substance for manufacture. The decisive test is functional and not confined to physical location within the factory. The Single Point Mooring system was found to be an integrated and indispensable part of the supply chain, used to berth vessels and pump raw material through connected pipelines directly to the tank farm for manufacture of the final product. On that reasoning, the system and its connected apparatus were held to form an integral part of the manufacturing process and to satisfy the user test. The denial of credit based on the system being outside the factory was rejected.

Conclusion: The question was answered in the negative against the Revenue and in favour of the assessee, and Modvat credit on the SPM system was held admissible.

Final Conclusion: The appeal succeeded on the ground that plant or equipment functioning as an integral and indispensable part of manufacture qualifies as capital goods even if located outside the factory premises.

Ratio Decidendi: For the purpose of Rule 57Q, equipment used as an integral and inseparable part of the manufacturing process qualifies as capital goods, and eligibility to credit does not depend solely on its physical presence within the factory.

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