Cenvat credit for testing equipment used with power transformers upheld where items were functionally connected to manufacture.

Digital multimeters, insulation resistance testers and vibration/noise meters were treated as part of the condition monitoring and testing system of power transformers, because they were used for assembly, certification and guaranteed performance in accordance with customer specifications and applicable standards. On those facts, the items were regarded as functionally connected with manufacture and as part of the integrated transformer product, so Cenvat credit as capital goods or as goods used in manufacture and testing was not denied.

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Issues: Whether Digital Multimeter, Insulation Resistance Tester (Megger) and Vibration meter/noise meter were eligible for Cenvat credit as capital goods or goods used in the manufacture and testing of power transformers.

Analysis: The items were shown to form part of the condition monitoring system of the power transformer and to be essential for testing, certification, and guaranteed performance. The power transformer was described as an integrated product made up of multiple systems, and the disputed equipment was used in assembling and testing the transformer in accordance with customer specifications and national or international standards. On these facts, the cited authorities on credit for items functionally connected with manufacture were held applicable.

Conclusion: The disputed items were treated as part of the transformer and the denial of Cenvat credit was not sustained. The appeal succeeded.

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