Modvat credit on capital goods remains available when exempt intermediate goods are captively used for dutiable final products.

Modvat credit on capital goods used to produce an exempt intermediate product is admissible where that intermediate product is captively consumed in the manufacture of dutiable final goods. The Board's circular and consistent Tribunal view treated the emergence of an exempt intermediate product as irrelevant by itself when the finished goods are chargeable to duty. On that basis, denial of credit was held unsustainable and the assessee was entitled to the credit.

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Issues: Whether Modvat credit on capital goods used to manufacture nitrogen gas was admissible when the nitrogen gas, though exempt at the intermediate stage, was captively consumed in the manufacture of dutiable final products.

Analysis: The disputed capital goods were used in a manufacturing chain where the intermediate product was not cleared independently but was consumed captively for the production of duty-paid final goods. The Board's circular clarified that credit should not be denied merely because the capital goods are used in the manufacture of intermediate goods exempt from duty, so long as those intermediate goods are used captively in the manufacture of finished goods chargeable to duty. The Tribunal also relied on the consistent view that emergence of an exempt intermediate product does not by itself disqualify credit on the capital goods used in the process.

Conclusion: The denial of Modvat credit was not sustainable and the assessee was entitled to the credit.

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