Modvat credit for process chemicals used in demineralisation is allowed when they are integral to manufacture of the final product.

Caustic soda and hydrochloric acid used in a demineralisation plant for producing steam needed in carbon black manufacture qualify as inputs for Modvat credit under Rule 57A. The exclusion for machines, machinery and equipment does not extend to goods used in maintaining plant and machinery, and direct consumption in the finished product is not required. It is sufficient that the goods are used in or in relation to manufacture. Because steam from demineralised water was an essential part of the manufacturing process, the chemicals used in that process were integral to manufacture and the denial of credit was unsustainable.

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Issues: Whether caustic soda and hydrochloric acid used in a demineralisation plant for producing steam used in the manufacture of carbon black qualified as inputs for Modvat credit under Rule 57A of the Central Excise Rules, 1944.

Analysis: The exclusion in Rule 57A applies to machines, machinery and equipment, not to goods used in the maintenance of plant and machinery as such. Modvat eligibility does not require direct consumption in the finished product; it is sufficient if the goods are used in or in relation to manufacture. The production of steam from demineralised water was found to be a necessary and essential part of the manufacturing process of carbon black. The use of caustic soda and hydrochloric acid in the demineralisation process was connected with that manufacturing process and was not a mere isolated maintenance activity.

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

Ratio Decidendi: Goods used in an integral and commercially necessary process that is in relation to the manufacture of the final product qualify as inputs, even if they are not directly consumed in the physical or chemical production of that product.

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