MODVAT credit denied for kraft paper used to make cartons, as packaging material was not an intermediate product for chocolate manufacture.

Kraft paper sent to a job worker for conversion into printed cartons, later used for packing chocolates, was held not to be an input in the manufacture of chocolates for MODVAT purposes. Rule 57F(2)(b) permits removal of inputs for manufacture of intermediate products necessary for the final product and their return for further use, but the decisive distinction is between an intermediate product and finished packaging material. The cartons made from kraft paper were treated as packaging material itself, not an intermediate product in the manufacture of the chocolates. MODVAT credit was therefore inadmissible on that basis, and the Revenue's appeal succeeded.

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Issues: Whether kraft paper sent to a job worker for conversion into printed cartons and thereafter used for packing chocolates could qualify as an input for the manufacture of the final product so as to justify MODVAT credit.

Analysis: Rule 57F(2)(b) permits removal of inputs outside the factory for manufacture of intermediate products necessary for the final product and return of such intermediate products for further use in manufacture. The controlling distinction is between an intermediate product and a finished packaging material. The cartons made from kraft paper were the packaging material itself and not an intermediate product in the manufacture of chocolates. Following the earlier Tribunal view, materials used to make packaging cannot be treated as inputs for the final product merely because the packaging is later used in relation to that product.

Conclusion: The kraft paper was not an input for the manufacture of chocolates and MODVAT credit was not admissible on that basis. The appeal of the Revenue succeeded.

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