Modvat credit on testing samples allowed where pre-use quality control forms an ancillary step in manufacture.

Modvat credit was treated as admissible on representative tyre cord fabric samples used only for testing and quality control before production. Testing in the factory laboratory to ascertain technical properties was regarded as an essential and ancillary step in manufacture, so physical incorporation of the samples into the final product was not required. The use of the samples for pre-use testing was considered within inputs used in or in relation to manufacture, and credit was therefore allowed on the representative samples.

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Issues: Whether modvat credit is admissible on representative samples of tyre cord fabrics used only for testing and quality control before the inputs are put to use in manufacture.

Analysis: The samples were tested in the factory laboratory to ascertain the technical characteristics and properties of the inputs before their actual use in production. Such testing was treated as an essential and ancillary part of the manufacturing process, and it was held that for modvat purposes physical incorporation of the samples in the final product was not required. The use of the samples for testing was considered the first step in the manufacture of tyres and, therefore, within the scope of inputs used in or in relation to manufacture.

Conclusion: Modvat credit was held admissible on the representative samples, and the Revenue's appeal was rejected.

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