Modvat credit on DG set components remains available under Rule 57Q despite third-party assembly and exempt final equipment.

Modvat credit under Rule 57Q was explained as available on capital goods received in the manufacturer's factory and used in manufacturing operations, even where the components were later assembled into a DG set by a third party. The distinction between Rule 57A, dealing with inputs used in or in relation to manufacture, and Rule 57Q, dealing with capital goods used in manufacture, was material. Duty-paid DG set components received in the assessee's name remained eligible for credit, and the exemption of the assembled generating set did not justify denial of credit on the components.

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Issues: Whether Modvat credit was admissible on the DG set components received in the factory and used for erection of the generating set, and whether credit could be denied on the ground that the DG set was assembled by a third party and the final generating set was exempt from duty.

Analysis: The dispute turned on the scope of Rule 57Q governing credit on capital goods. The distinction between Rule 57A, which speaks of inputs used in or in relation to manufacture, and Rule 57Q, which requires only that capital goods be used in the manufacture of the specified final products, was material. The components of the DG set were received in the assessee's name, duty was paid on them, and they were capital goods covered by the rule. The fact that the components were assembled into a generating set by another party did not alter the availability of credit on the components. The mere circumstance that the assembled DG set was exempt did not justify denial of credit where the credit was claimed on components used in the factory as capital goods.

Conclusion: Credit was admissible to the assessee on the DG set components. The denial of Modvat credit was unsustainable and the issue was decided in favour of the assessee.

Ratio Decidendi: For Modvat under Rule 57Q, capital goods received in the manufacturer's factory and used there for the assessee's manufacturing operations remain eligible for credit even if they are assembled into a generating set by a third party and the assembled set is exempt from duty.

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