Modvat credit on capital goods may be used on receipt in an existing factory, without waiting for installation.

Modvat credit on capital goods was treated as available on receipt of duty-paid goods into an already operational factory, without waiting for actual installation, because the scheme did not expressly impose an installation-based restriction. The Tribunal compared the capital goods provisions with the inputs scheme, where prior use was not a condition for credit utilisation, and relied on the Board circular clarifying that existing factories could utilise such credit immediately on receipt. On that basis, the contrary departmental view was rejected and the discussion notes that the demand and penalty were unsustainable.

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Issues: Whether Modvat credit on capital goods could be taken and utilised before the capital goods were actually installed in a factory that was already in existence.

Analysis: The dispute turned on the construction of the Modvat provisions relating to capital goods. The departmental view was that the expression referring to capital goods used by the manufacturer in the factory required actual installation before credit could be utilised. The Tribunal noted that credit was permissible on receipt of the goods with duty-paid documents, that the scheme did not create an embargo on utilisation until installation, and that the same Modvat framework under the inputs provisions had never been treated as requiring actual prior use before credit utilisation. It was also noted that the factory was already operational, and the Board circular clarified that, for existing plants, credit on capital goods received into the factory could be utilised immediately, with the earlier contrary understanding having been modified by the later circular.

Conclusion: Modvat credit on capital goods could be taken and utilised before installation in the case of an existing factory manufacturing and clearing the final product. The demand and penalty were unsustainable.

Ratio Decidendi: Where the relevant Modvat scheme permits credit on receipt of capital goods and the factory is already operational, credit need not await actual installation of the capital goods unless the rules expressly impose such a restriction.

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