Modvat credit on exempt intermediate products remains available when they are captively used to make dutiable final goods.

Modvat credit on duty-paid inputs remains available where exempt intermediate products emerge during manufacture and are captively consumed in producing the final dutiable product. Rule 57D(2) protects such credit even if the intermediate goods are classifiable under the tariff or are deliberately manufactured as part of the process, because their emergence does not alter their character as intermediate products for credit purposes. The article treats the credit provisions as analogous to the earlier scheme and states that credit cannot be denied merely because the intermediate resin is exempt from duty; the assessee is entitled to the credit.

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Issues: Whether Modvat credit on inputs used in the manufacture of exempt intermediate products is admissible when those intermediate products are captively consumed in the manufacture of final dutiable products.

Analysis: Rule 57D(2) protects credit on inputs notwithstanding the emergence of intermediate products during manufacture, provided those intermediate products are used within the factory in the manufacture of dutiable final products. The fact that such intermediate goods are classifiable in the tariff or are themselves fully manufactured does not destroy their character as intermediate products for the purpose of the rule. The rule is not confined to accidental by-products or residue, and it applies where the manufacturing process deliberately brings into existence an intermediate product that is then used to produce the final product. The earlier decision relied upon was treated as applicable to the Modvat scheme because the relevant credit provisions were considered analogous.

Conclusion: Modvat credit could not be denied merely because the intermediate resins were exempt from duty and deliberately manufactured before being used in the final product; the assessee was entitled to the credit.

Final Conclusion: The appeal succeeded and the order denying credit was set aside, with consequential relief to the assessee.

Ratio Decidendi: Credit on duty-paid inputs cannot be denied under Rule 57D(2) where exempt intermediate products emerge during manufacture and are captively used in producing the final dutiable product.

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