Modvat credit on capital goods upheld where duty-paid engine and alternator were used to generate electricity for manufacture.

Rule 57Q allowed Modvat credit on duty-paid capital goods used in the factory to produce electricity for manufacture of final products, and it did not require the broader "in or in relation to" test found in Rule 57A. The duty-paid engine and alternator, though assembled into a diesel generating set by another fabricator, remained eligible because credit was claimed on the components and they were not used solely to make the generating set. The exemption status of the generating set did not bar credit, and the identity of the assembler was irrelevant.

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Issues: Whether duty-paid engine and alternator, assembled into a diesel generating set, were eligible for Modvat credit under Rule 57Q, and whether credit was barred because the generating set was ultimately exempt and the assembler was not the person taking credit.

Analysis: Rule 57Q requires that capital goods be used in the manufacture of specified final products, and unlike Rule 57A it does not require use "in or in relation to" the manufacture of the final product. The components were acquired for use in the factory to generate electricity for the manufacture of the respondents' final products, and were not used exclusively to manufacture the diesel generating set. The construction urged by the department would defeat the scheme of capital goods credit and lead to an untenable denial of credit in cases where components are fitted into machinery or plant. The fact that the generating set was assembled by another fabricator did not matter, because the credit was claimed on the duty paid on the components and not on the generating set itself.

Conclusion: The respondents were entitled to Modvat credit under Rule 57Q, and the objections based on exemption of the generating set and identity of the fabricator failed.

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