Modvat credit on leased capital goods remains available when machinery stays installed and used in manufacture

Modvat credit on capital goods cannot be denied merely because the goods were sold to a finance company and then taken back on lease, where they remained installed in the factory and continued to be used in manufacture. The finance arrangement was only a method to recover the cost of the capital goods, and the goods were not physically removed. Notification No. 27/94-C.E. (N.T.) recognised credit for capital goods acquired under lease, hire-purchase or loan arrangements from a finance company, so the denial of credit was not justified.

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Issues: Whether Modvat credit on capital goods could be denied merely because the goods were sold to a finance company and taken back on lease while remaining installed and used in the factory.

Analysis: The capital goods had been installed in the factory and were not physically removed. The finance arrangement was entered into only to recover the cost of the capital goods, and the goods continued to be used in manufacture. Notification No. 27/94-C.E. (N.T.) dated 17-6-1994 permitted credit in respect of capital goods acquired on lease, hire-purchase or loan agreement from a finance company. In these circumstances, denial of credit was not justified.

Conclusion: The denial of Modvat credit was incorrect and the assessee was entitled to the credit.

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