Capital goods treatment for air conditioners supported Modvat credit where controlled factory environment was necessary for precision assembly.

Split type air conditioners under Heading 8415 were treated as capital goods for Modvat credit under Rule 57Q because the expression covering goods used for producing or processing was applied broadly and was not limited to machinery directly changing the substance of goods. The units were installed in factory areas requiring a dust-free, controlled environment for assembling high precision bearings, which brought them within the functional scope of capital goods. They were not specifically excluded during the relevant period, and a later exclusion could not affect that period. Modvat credit was therefore admissible.

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Issues: Whether split type air conditioners falling under Heading 8415 were eligible as capital goods for Modvat credit under Rule 57Q.

Analysis: The definition of capital goods under Rule 57Q was applied in the light of the Larger Bench ruling, which held that the expression used for producing or processing of any goods is not confined to machinery directly effecting change in substance. The air conditioners were installed in factory areas where a dust-free and controlled environment was necessary for assembling high precision bearings, and they were not specifically excluded from the scope of capital goods at the relevant time. The subsequent exclusion introduced later did not govern the period in dispute.

Conclusion: The air conditioners were eligible capital goods and Modvat credit was admissible.

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