Integrated manufacturing process supports Modvat credit for cutting gas used to prepare scrap for furnace feeding.

Oxygen and acetylene gas used to cut scrap into smaller pieces for feeding into the furnace was treated as an input used in relation to manufacture, because it formed part of the integrated manufacturing process for producing steel ingots and steel castings. Rule 57A allowed Modvat credit on inputs used directly or indirectly in relation to manufacture, and the exclusion for machinery and other capital goods under Section 57B did not apply to such consumable materials. The gas therefore qualified for Modvat credit, and the reference was answered in favour of the assessee.

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Issues: Whether oxygen/acetylene gas used for cutting scrap into smaller pieces for feeding into the furnace was used in or in relation to the manufacture of final products so as to qualify for Modvat credit.

Analysis: Rule 57A allowed credit on inputs used in or in relation to the manufacture of final products, whether directly or indirectly, while the exclusion under Section 57B related to machines, machinery, equipment, apparatus, tools, appliances and capital goods. The use of oxygen/acetylene gas in cutting scrap into smaller pieces for use in the furnace formed part of the integrated manufacturing process connected with production of steel ingots and steel castings. Material used in such process was treated as an input eligible for Modvat credit.

Conclusion: The gas was used in relation to manufacture of the final products, and the assessee was entitled to Modvat credit on it.

Final Conclusion: The reference was answered in favour of the assessee and against the revenue on the availability of Modvat credit for the gases used in the manufacturing process.

Ratio Decidendi: Goods or materials used as part of an integrated manufacturing process, even if not contained in the final product, qualify as inputs used in or in relation to manufacture for Modvat credit, unless they fall within the specific exclusion for capital goods.

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