Modvat credit on vehicle tool kits and jack assemblies allowed where they formed part of the marketable finished product.

Tool kits and jack assemblies supplied with motor vehicles, whose value was included in the assessable value and which were necessary to clear the vehicles in marketable form, were treated as inputs used in relation to manufacture and qualified for Modvat credit. The exclusion clause for tools did not apply because the articles were not used to produce, process, or effect a change in goods; being tools alone was insufficient to deny credit. The assessees could also rely on the CBEC instruction then in force, which bound departmental officers until withdrawn. The impugned orders were therefore unsustainable and credit was held admissible.

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Issues: (i) Whether tool kits and jack assemblies supplied along with motor vehicles are inputs used in relation to the manufacture of the vehicles and therefore eligible for Modvat credit. (ii) Whether such articles are excluded from the definition of inputs as tools under the exclusion clause to Rule 57A. (iii) Whether the assessees were entitled to rely on the CBEC instruction in force during the relevant period.

Issue (i): Whether tool kits and jack assemblies supplied along with motor vehicles are inputs used in relation to the manufacture of the vehicles and therefore eligible for Modvat credit.

Analysis: The articles were supplied along with the vehicles according to the trade pattern, their value was included in the assessable value, and the vehicles were cleared in a marketable and deliverable state only with those articles. The expression "used in relation to manufacture" was construed broadly, in light of the marketability principle and the wider meaning given to that expression in earlier decisions. Even though the articles did not undergo any manufacturing process, they formed part of the finished product as marketed at the factory gate.

Conclusion: The tool kits and jack assemblies were inputs used in relation to the manufacture of motor vehicles and were eligible for Modvat credit.

Issue (ii): Whether such articles are excluded from the definition of inputs as tools under the exclusion clause to Rule 57A.

Analysis: The exclusion clause applies to tools used for producing or processing goods or for bringing about a change in a substance in or in relation to manufacture. The articles in question were not used for producing or processing any goods and did not bring about any change in a substance. Merely being tools was not enough to attract the exclusion. The contrary view was rejected as having overlooked the full content of the exclusion clause.

Conclusion: The tool kits and jack assemblies were not excluded from the definition of inputs under the exclusion clause.

Issue (iii): Whether the assessees were entitled to rely on the CBEC instruction in force during the relevant period.

Analysis: The instruction allowing Modvat credit on tool kits and jack assemblies was in force during the relevant period and had binding force on the departmental officers until withdrawn. A subordinate authority could not ignore the operative circular for the period in question.

Conclusion: The assessees were entitled to the benefit of the then-prevailing CBEC instruction.

Final Conclusion: The impugned orders were unsustainable and the appeals succeeded, with Modvat credit held admissible on the tool kits and jack assemblies supplied with the vehicles.

Ratio Decidendi: Articles supplied with a motor vehicle as part of the trade pattern and necessary to render the vehicle marketable at the factory gate may be inputs used in relation to manufacture, and they are not excluded merely because they are tools unless they are used for producing, processing, or effecting a change in goods within the meaning of the exclusion clause.

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