Modvat credit on rejected dry battery cells remained available where rejects arose before completion of manufacture and were destroyed as waste.

Modvat credit on duty-paid inputs used in dry battery cells rejected at final testing and inspection was held to remain available, because manufacture under Section 2(f) extends to processes incidental or ancillary to completion of the product and the RG 1 stage was reached only after such testing. Cells failing that stage were not complete marketable goods and, before destruction, constituted waste and scrap arising in the course of manufacture. Rule 57F(4)(c) supported destruction of the rejects, and Rule 57D(1) covered waste arising during manufacture of the final product. The disallowance of credit was therefore not justified, and the assessee was entitled to the credit and consequential benefits.

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Issues: Whether Modvat credit attributable to duty-paid inputs contained in dry battery cells rejected at the final testing and inspection stage, destroyed and cleared as waste and scrap, was disallowable on the footing that such rejects did not arise during manufacture and were outside Rule 57D(1) of the Central Excise Rules.

Analysis: Manufacture under Section 2(f) of the Central Excises and Salt Act, 1944 includes processes incidental or ancillary to the completion of a manufactured product. The RG 1 stage for dry cells was the point after final testing and inspection, so goods failing those tests had not yet reached completion of manufacture. Cells rejected at that stage were unfit for marketing and, before destruction, constituted waste and scrap arising in the course of manufacture. Their destruction was consistent with Rule 57F(4)(c), and Rule 57D(1) extends to waste arising during manufacture of the final product.

Conclusion: The disallowance of Modvat credit on the duty-paid inputs contained in the rejected dry battery cells was not justified under Rule 57D(1), and the assessee was entitled to the credit and consequential benefits.

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