Rule 57R and job-worked goods: intermediate clearances linked to dutiable final products do not lose Modvat credit.

Capital goods used exclusively for job-work manufacture of piston valves and cleared without duty to the principal manufacturer were not treated as exempted goods under Rule 57R of the Central Excise Rules, 1944. The decisive point was that duty was ultimately discharged when the principal manufacturer cleared the final product, and the assessable value of the job-worked intermediate goods formed part of that dutiable final product. On that basis, the intermediate goods were not regarded as wholly exempt or chargeable at nil rate, so Modvat credit was not denied. The assessee accordingly succeeded.

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Issues: Whether capital goods used exclusively for manufacturing piston valves on job work basis and cleared without duty to the principal manufacturer were hit by Rule 57R of the Central Excise Rules, 1944 on the footing that the goods were exempted goods, so as to deny Modvat credit.

Analysis: The decisive question was whether goods cleared by a job worker under the special procedure were to be treated as exempted goods. The relevant scheme showed that, although duty was not paid at the job worker's end, duty was ultimately paid at the principal manufacturer's end when the final product was cleared. The assessable value of the job-worked goods entered into the value of the final dutiable product, and therefore the intermediate goods could not be characterised as wholly exempted or chargeable to nil rate duty for the purpose of Rule 57R. The reasoning also supported the view that capital goods not yet actually utilised for dutiable manufacture could still retain credit eligibility if they were capable of future use in such manufacture.

Conclusion: The goods were not exempted goods for the purpose of Rule 57R, and the Modvat credit was not recoverable. The assessee succeeded.

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