Modvat credit on intermediate parts survives inter-factory transfer when the final tractor product bears duty.

Duty-paid inputs used to manufacture intermediate parts may qualify for Modvat credit when those parts are transferred between factories of the same manufacturer and are ultimately consumed in making a dutiable final product. The text explains that the notification allowed input use in another factory of the same manufacturer, and Rule 57D(2) prevented denial of credit merely because intermediate products were exempt or not duty-paid, so long as duty was paid on the end-product. Credit is not available where the parts are sold in the open market or used in tractors on which no duty is paid. The scheme's object is to avoid cascading duty, not to defeat credit for intermediate manufacture.

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Issues: Whether Modvat credit was admissible on duty-paid inputs used in the manufacture of parts cleared to another factory of the same manufacturer without duty, where the parts were ultimately used in the manufacture of tractors on which duty was paid.

Analysis: The notification expressly permitted inputs to be used within the factory of production or in any other factory of the same manufacturer. The mere transfer of parts from one factory to another did not make the parts the final product. Rule 57D(2) recognised that intermediate products may come into existence in the course of manufacture, and credit could not be denied merely because such intermediate products were exempt or not duty-paid, so long as duty was paid on the final product. The object of the scheme was to prevent cascading of duty, not to deny credit where the taxable end-product suffered duty. The parts manufactured for use in tractors were intermediate products, and the benefit of the notification was not lost merely because they moved between factories.

Conclusion: Modvat credit was allowable to the assessee on inputs used for manufacture of parts, provided those parts were used in the manufacture of tractors on which duty was paid; credit was not available where the parts were sold in the open market or used in tractors on which no duty was paid.

Final Conclusion: The impugned order was set aside and the appeals were allowed, affirming entitlement to the exemption-linked credit in relation to parts used in duty-paid tractors.

Ratio Decidendi: Where duty-paid inputs are used to make intermediate products that are themselves consumed in the manufacture of a dutiable final product, Modvat credit cannot be denied merely because the intermediate products are transferred without duty between factories of the same manufacturer.

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