Modvat credit on trial production inputs remains admissible even where manufacturing yields waste, scrap, or no final product.

Modvat credit was held admissible on inputs used in trial production because the inputs were employed in or in relation to manufacture, and the trial run formed an essential part of that process. Credit could not be denied merely because the trial stage yielded waste, scrap, or no marketable final product. Rule 57D also protected credit where part of the inputs became waste or refuse during manufacture. On that basis, the Revenue's appeal was rejected.

---

---

Issues: Whether Modvat credit of duty paid on inputs used in trial production was admissible when the goods produced during such trial run resulted in waste and scrap and no good quality final product emerged.

Analysis: The inputs were admittedly used in the manufacture of the final products, and their use in trial production did not take them outside the scope of manufacture. Credit could not be denied merely because the production was at a trial stage or because a usable final product did not emerge. Rule 57D further provided that credit would not be denied or varied on the ground that part of the inputs was contained in waste or refuse arising during manufacture, or that the inputs themselves became waste during the course of manufacture. The trial run was treated as an essential part of the manufacturing process.

Conclusion: Modvat credit on the inputs used in trial production was admissible, and the Revenue's appeal was rejected.

Ratio Decidendi: Inputs used in trial production remain eligible for Modvat credit where they are used in or in relation to manufacture, and credit cannot be denied merely because the process yields waste, scrap, or no marketable final product.

---