Capital goods under Modvat credit include plant and equipment essential to production, not only items directly used in manufacture.

Compressor, air-conditioning plant parts, weighing machines, electrical transformers and similar items were treated as capital goods for Modvat credit under Rule 57Q(1) of the Central Excise Rules, 1944. The Tribunal applied the larger Bench view that equipment used to regulate temperature and humidity in a pharmaceutical factory could qualify as capital goods, and rejected the narrower approach that only goods directly used in production or processing were eligible. It also read the Rule 57Q explanation to cover goods without which production or processing could not take place. On that basis, the items qualified and Modvat credit was allowed.

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Issues: Whether compressor, air-conditioning plant parts, weighing machine, electrical transformer and similar items were eligible as capital goods for Modvat credit under rule 57Q(1) of the Central Excise Rules, 1944.

Analysis: The denial was based on the view that the goods were not directly used in production or processing and that compressors and refrigeration or air-conditioning equipment were excluded by the explanation to rule 57Q(1). The Tribunal applied the larger Bench ruling which had held that goods used to regulate temperature and humidity in a pharmaceutical factory could qualify as capital goods and had disapproved the earlier contrary view. It further held that the explanation under clause (a) covered not only goods directly employed in production or processing, but also goods without which such production or processing could not take place.

Conclusion: The items in question qualified as capital goods and the assessee was entitled to Modvat credit. The departmental appeal was dismissed.

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