MODVAT credit on mercury used in electrolytic manufacture was upheld as an eligible input under the wide manufacturing nexus test.

Mercury used as a cathode in the electrolytic process for manufacture of caustic soda was treated as an input consumed in and directly participating in manufacture. Applying the wide meaning of "in or in relation to manufacture," the Tribunal held that items essential to the manufacturing process may qualify for MODVAT credit unless they fall within excluded categories such as machinery, plant, equipment, apparatus, tools or appliances. MODVAT credit on mercury was therefore admissible and the Revenue's challenge failed.

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Issues: Whether mercury used as a cathode in the electrolytic process for manufacture of caustic soda was eligible for MODVAT credit under Rule 57A.

Analysis: The mercury was found to be consumed in the electrolytic process and to participate directly in manufacture. The reasoning followed the settled approach that the expression "in or in relation to manufacture" has wide amplitude and covers inputs that are essential to the manufacturing process even if they are not finished goods or machinery. The material was not shown to be an excluded item in the nature of machinery, plant, equipment, apparatus, tools or appliances.

Conclusion: MODVAT credit on mercury was admissible, and the Revenue's challenge failed.

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