Modvat credit on capital goods remains admissible where exempt intermediate sliver arises in the manufacture of dutiable cotton yarn.

Modvat credit on capital goods and inputs used in cotton yarn manufacture could not be denied merely because an exempt intermediate product, such as carded/combed cotton or sliver, emerged in the process. Rule 57R(2) protects credit where intermediate products arise during manufacture of a dutiable final product, and a later classification of the intermediate under Heading 52.02 did not alter that position. The reasoning also noted that the intermediate sliver was not marketable and that Board clarification supported admissibility of credit where exempt intermediates are captively consumed in producing dutiable goods.

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Issues: Whether Modvat credit on capital goods and inputs used in the manufacture of cotton yarn could be denied merely because an intermediate product, namely carded/combed cotton or sliver, emerged during the manufacturing process and was exempt from duty.

Analysis: Rule 57R(2) contemplates that credit on specified capital goods is not to be denied or varied merely because intermediate products come into existence during manufacture, provided the finished product is dutiable. The fact that the intermediate product was classified under Heading 52.02 only from a later date did not justify denial of credit for capital goods used in the overall manufacturing stream. The reasoning was reinforced by the settled position that such intermediate sliver was not marketable and by the Board's clarification that credit should not be denied where exempt intermediate products are used captively in the manufacture of dutiable final goods.

Conclusion: Modvat credit was admissible and could not be denied to the assessees.

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