MODVAT credit on consumables used to make goods marketable was allowed for photo film used in camera calibration.

Photo film consumed within the factory to adjust camera parameters, eliminate distortion and determine least count qualified as material used in relation to manufacture. The film was treated as part of the manufacturing process, not as a mere post-manufacture quality check, because it was necessary to make the semi-automatic camera marketable. On that basis, the film was held eligible for MODVAT credit and the disallowance was unsustainable.

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Issues: Whether photo film used and consumed within the factory for adjusting the camera, eliminating distortion and determining least count was eligible for MODVAT credit as a material used in relation to manufacture of the final product.

Analysis: The film was not used merely for a post-manufacture quality check. It was used in the manufacturing process to set the camera parameters so that the semi-automatic camera emerged as a marketable commodity. Material that is necessary to render the goods marketable and is consumed in the factory for that purpose falls within the expression used in relation to manufacture.

Conclusion: The photo film was eligible for MODVAT credit and the disallowance was unsustainable.

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