Modvat credit for packing materials used in integral clearance process was treated as admissible under Rule 57A.

Modvat credit under Rule 57A was considered available for LDPE granules used to manufacture plastic bags in which finished yarn was packed, because the packing process was treated as an incidental and ancillary part of manufacture and clearance. Packing yarn first in plastic bags and then in corrugated cartons was treated as integrally connected with the manufacturing process, and the argument that the bags were not directly used on the final product was rejected. On that approach, materials used to make such packing can qualify as inputs where the packing is part of the clearance process.

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Issues: Whether Modvat credit was admissible on LDPE granules used for manufacturing plastic bags in which the finished yarn was packed.

Analysis: The credit claim was examined under Rule 57A on the footing that the granules were used to make packing bags and not the final product directly. It was held that the packing of yarn first in plastic bags and then in corrugated cartons formed part of the manufacturing process in an incidental and ancillary sense. The earlier denial based on the specific rate of duty and the fresh appellate ground that the bags were not essential for marketing were both rejected in light of the settled approach that packing material, and materials used to make such packing, can qualify as inputs where the packing is integrally connected with manufacture and clearance.

Conclusion: Modvat credit on the LDPE granules was held admissible and the denial of credit was set aside in favour of the assessee.

Ratio Decidendi: Materials used to manufacture packing used as an integral and ancillary part of the clearance process can qualify as inputs for Modvat credit under Rule 57A.

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