Capital goods credit remains available for duty-free intermediate goods when the final products are cleared on payment of duty.

Capital goods credit under Rule 57Q was admissible where an injection moulding machine was used to make intermediate goods cleared without duty to another unit of the same assessee, because the final shaving systems were dutiable. Rule 57C did not bar credit when the exempt clearance was only of intermediate goods and not the final products. The declaration filed under Rule 57T also negatived any allegation of suppression for limitation purposes.

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Issues: Whether capital goods credit under Rule 57Q of the Central Excise Rules was admissible on an injection moulding machine used to manufacture intermediate goods which were cleared without duty to another unit of the same assessee, where the final product manufactured in the other unit was cleared on payment of duty, and whether Rule 57C barred such credit.

Analysis: The assessee had two plants. One manufactured razor blade handles, which were cleared as intermediate goods under Rule 57F(4) and used in the manufacture of shaving systems in the other plant. The shaving systems were the final products and were cleared on payment of duty. The rule against Modvat credit where final products are exempt does not apply when the goods manufactured without duty are only intermediate goods and the ultimate final products are dutiable. The credit scheme is intended to prevent cascading, and the principle laid down in the cited decision on Notification No. 217/86-C.E. supported denial of credit only where the final products themselves were not dutiable. The declaration under Rule 57T also negatived the allegation of suppression for the purpose of limitation.

Conclusion: Capital goods credit under Rule 57Q was admissible. The bar under Rule 57C did not apply, and the assessee succeeded.

Ratio Decidendi: Capital goods credit cannot be denied merely because the goods manufactured with such capital goods are intermediate goods cleared without duty, if those goods are used in the manufacture of final products that are cleared on payment of duty.

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