Modvat credit on trial-run inputs allowed where raw materials were used in manufacture and final goods were cleared on duty payment.

Modvat credit was treated as admissible on raw materials consumed during trial run production before commercial commencement, because such materials were used in or in relation to manufacture of the final product. The fact that the plant had not yet entered commercial production did not, by itself, defeat credit entitlement where the final goods were later cleared on payment of duty. On that basis, denial of credit, together with the related demand, penalty and interest, was held unsustainable.

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Issues: Whether Modvat credit was admissible on raw materials used during the trial run of the plant before commencement of commercial production.

Analysis: The credit was taken in respect of raw materials consumed during the trial run of the plant. The final goods manufactured from those materials were subsequently cleared on payment of duty. Raw materials used in trial production are treated as inputs used in or in relation to the manufacture of the final product, and the absence of commercial production at that stage does not by itself defeat credit entitlement.

Conclusion: The Modvat credit was admissible and the denial of credit, along with the consequential demand, penalty, and interest, was unsustainable.

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