Modvat credit for tapping electrodes used in captive manufacture was allowed on the indispensability test.

Tapping electrodes used in the manufacture of calcium carbide were treated as inputs used in or in relation to manufacture because they performed an essential function by generating the electric arc and keeping the material molten for removal from the furnace. Since the calcium carbide was captively consumed in producing PVC resin, the same functional nexus extended to the final product. The applicable test was indispensability to the manufacturing process, not physical presence in the end product. Modvat credit was therefore available and denial of credit was unsustainable.

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Issues: Whether tapping electrodes used in the manufacture of calcium carbide, which was captively consumed in the manufacture of PVC resin, qualified as inputs for Modvat credit under Rule 57A.

Analysis: Tapping electrodes were found to perform an essential function in the manufacture of calcium carbide by generating an electric arc and keeping the material molten for removal from the furnace. On that basis, they were inputs used in or in relation to the manufacture of calcium carbide. Since the calcium carbide was captively used in the manufacture of PVC resin, the same functional nexus extended to the final product. The applicable test was whether the item was indispensable to the manufacturing process, and not whether it was physically present in the end product.

Conclusion: The tapping electrodes were eligible inputs for Modvat credit, and the denial of credit was unsustainable.

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