Modvat credit for manufacturing inputs extended to wire mesh and felt cloth used in paper production.

Wire mesh and felt cloth used in the manufacture of paper and paper board were treated as inputs eligible for Modvat credit under Rule 57A because the rule extends credit to inputs used in or in relation to manufacture, directly or indirectly. The exclusion in Rule 57B for machines, machinery, equipment, tools, appliances and capital goods did not apply on the facts, as the disputed items were used in the manufacturing process and were not treated as capital goods. The analysis relied on earlier authority recognising that materials functioning as inputs in manufacture can qualify for credit.

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Issues: Whether wire mesh and felt cloth used in the manufacture of paper and paper board were eligible for Modvat credit as inputs under Rule 57A of the Central Excise Rules.

Analysis: Rule 57A allows credit on inputs used in or in relation to the manufacture of final products, whether directly or indirectly, while Rule 57B excludes credit on machines, machinery, equipment, apparatus, tools, appliances, and capital goods. The Court noted that the disputed items were used in the manufacturing process and relied on earlier authority holding that materials used in manufacture, including parts of machinery where they function as inputs, can qualify for Modvat credit. Applying that principle, the Court treated wire mesh and felt as inputs eligible for credit.

Conclusion: Wire mesh and felt cloth used in the manufacture of final products are entitled to Modvat credit, and the issue is answered in favour of the assessee and against the revenue.

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