Functional nexus with manufacture governs Modvat credit; asbestos corrugated sheets failed as mere covering material.

Modvat credit was treated as available for capital goods and related items used in or in relation to manufacture where they had a functional and integral nexus with the manufacturing process. On that approach, credit was admissible on PVC pipes and fittings, HDPE pipes and tubes, staging structural material, centrifugal machinery, MS plates, slag wool, MS tanks and accessories, ceramic fibre blankets and conductors. Credit was denied only for corrugated sheets made of asbestos because they were used merely as covering for the heat exchanger and lacked the required manufacturing nexus.

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Issues: Whether Modvat credit was admissible on the disputed capital goods, namely PVC pipes and fittings, HDPE pipes and tubes, staging structural material, centrifugal machinery, MS plates, slag wool, MS tanks and accessories, corrugated sheets, ceramic fibre blankets and conductors.

Analysis: The disputed items were examined on the basis of their use in the factory and their nexus with the manufacture of the final product. Credit was held admissible on all the items except corrugated sheets made of asbestos, which were found to be used only as covering for the heat exchanger and not as goods used in or in relation to manufacture. The reasoning adopted the accepted approach that capital goods qualify where they have a functional and integral connection with the manufacturing process.

Conclusion: Modvat credit was admissible on all the items except corrugated sheets made of asbestos; the denial of credit was sustained only to that limited extent.

Ratio Decidendi: Capital goods are eligible for Modvat credit where they are used in or in relation to manufacture and have a functional nexus with the manufacturing process, but items used merely as protective or covering material without such nexus are not eligible.

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