Modvat credit for steel shots used in shot blasting was allowed because they were integrally connected with manufacture.

Steel shots used in shot blasting to clean castings and make them marketable were treated as inputs used in relation to manufacture for Modvat credit under Rule 57A. The Tribunal applied the broader "used in relation to manufacture" test and accepted that an item need not enter the finished product if it is integrally connected with the manufacturing process. Credit could not be denied merely because the goods were used in machinery or for the machinery's purpose, unless they fell within the express exclusion clause. On that basis, the disallowance of Modvat credit was unsustainable.

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Issues: Whether steel shots used in the shot blasting process were inputs eligible for Modvat credit under Rule 57A of the Central Excise Rules, 1944.

Analysis: The assessee used steel shots to clean castings in a shot blasting machine so that the castings became marketable. The Tribunal applied the broader interpretation of the expression "used in relation to manufacture" and relied on the principle that goods need not enter the finished product if they are used in an activity connected with the manufacturing process. It held that the later larger Bench view was binding and that goods so used could not be denied credit merely because they were employed in machinery or for the purpose of the machinery, unless they squarely fell within the exclusion clause.

Conclusion: Steel shots were held to be eligible inputs and the disallowance of Modvat credit was unsustainable.

Final Conclusion: The assessee succeeded on the merits and obtained relief against the denial of Modvat credit.

Ratio Decidendi: Goods used in an activity integrally connected with manufacture are inputs for Modvat purposes if they are used in relation to the manufacturing process and are not excluded by the specific exclusion clause.

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