Factory premises test for Modvat credit: capital goods at an off-site reservoir did not qualify for input credit.

Modvat credit under Rule 57Q was confined to capital goods used within the factory premises or precincts. The CEGAT treated "factory" under Section 2(e) as the area where manufacture or a connected manufacturing process is carried on, not a separate site outside the factory boundary. A pump installed at a reservoir about one kilometre from the factory was outside the factory ground plan and was not separately registered under Rule 174. Because the reservoir site merely supplied water for manufacture and was not part of the factory, the pump did not qualify as capital goods used in the factory and credit was inadmissible.

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Issues: Whether capital goods installed at a water reservoir about one kilometre away from the factory were eligible for Modvat credit under Rule 57Q as goods used in the factory, having regard to the definition of "factory" in Section 2(e) and the registration requirement under Rule 174.

Analysis: Rule 57Q allowed credit only on capital goods used in the factory. The expression "factory" in Section 2(e) was held to cover the premises and precincts where manufacture or a connected manufacturing process is carried on, but not a place outside the factory precincts. The reservoir site was neither part of the factory ground plan nor separately registered, and the drawing of water from a distant reservoir was not treated as a manufacturing process within the factory. The reasoning in the earlier decision denying credit for machinery used in a separate mining area was followed.

Conclusion: The pump installed at the reservoir was not capital goods used in the factory, so Modvat credit was inadmissible.

Final Conclusion: The reference was answered against the assessee and the denial of Modvat credit was upheld.

Ratio Decidendi: For the purpose of Modvat credit, capital goods must be used within the factory premises or its precincts, and a facility located outside those limits does not qualify merely because it supplies an input required for manufacture.

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