MODVAT credit on inputs used through exempt intermediate products was upheld where the goods were consumed in further manufacture.

Inputs used to manufacture caustic soda lye and caustic soda flakes were treated as eligible for MODVAT credit where those products functioned as in-process materials in the manufacture of the declared final product. The mere fact that the intermediate goods were separately exempt from duty did not, by itself, bar credit when the record showed they emerged during the manufacturing process and were consumed within the factory in onward production. The appellate view that such goods were intermediate products for MODVAT purposes was upheld, and the assessee's entitlement to credit was affirmed.

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Issues: Whether inputs used in the manufacture of caustic soda lye and caustic soda flakes, which were themselves used as in-process materials in the manufacture of the declared final product, were entitled to MODVAT credit notwithstanding exemption available to the intermediary products.

Analysis: The scheme of MODVAT was applied in the context of the assessee's manufacturing process. Where inputs are used to produce an in-process material that is further used in the manufacture of the final product, that material is to be treated as an intermediate product for the purpose of the MODVAT scheme. The mere fact that caustic soda lye and caustic soda flakes were separately exempted from duty did not by itself disentitle credit, since the record showed that they emerged during manufacture and were used within the factory in the onward production process. The lower appellate authority's view that the goods were intermediate products and that credit could not be denied was upheld.

Conclusion: The assessee was entitled to MODVAT credit and the Revenue's challenge failed.

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