Modvat credit on essential battery cells for quartz clocks is admissible when supplied with the finished product and valued in assessment.

Duty-paid dry battery cells fitted in quartz wall clocks and time pieces were treated as eligible Modvat inputs because they were essential to the functioning of the marketed product and not a mere accessory. The expression "used in or in relation to manufacture" was read broadly to cover items forming part of the final marketable product supplied at the factory gate. Credit was therefore admissible where the cells were compulsorily supplied with each clock, packed with it, and their value formed part of the assessable value, subject to factual verification of those conditions.

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Issues: Whether duty-paid dry battery cells fitted in quartz wall clocks and time pieces are eligible inputs for Modvat credit under Rule 57A.

Analysis: The dry battery cell was held to be essential for the functioning of the quartz clock and not a mere accessory. The expression "used in or in relation to the manufacture" was construed broadly to include items that form part of the final marketable product supplied at the factory gate. Applying the distinction between a component and an accessory, and following the principle that an item essential for making the product fit for marketing may qualify as an input, the battery cell was treated as an essential component when it is compulsorily supplied with the clock, packed with it, and its cost is included in the value of the final product.

Conclusion: Modvat credit on the dry battery cells is admissible in favour of the assessee, subject to factual verification that the cells are supplied in the required number with each clock and that their value is included in the assessable value.

Ratio Decidendi: An item that is essential to the functioning and marketed along with the final product as part of the factory-gate sale can fall within "inputs" used in or in relation to manufacture for Modvat credit purposes, even if it is not part of the manufacturing process in the narrow sense.

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