Capital goods credit depends on direct functional nexus with manufacture; fabrication material and maintenance equipment were excluded.

Modvat credit on capital goods was confined to items falling within the statutory definition and having a direct functional nexus with manufacture. Surge arrestors qualified because they functioned as transformer components used in the factory, and the stationary battery qualified because it supported captive power generation linked to cement manufacture. MS angles, columns and girders were excluded as fabrication or construction material for the mill structure, and workshop equipment was excluded because it was used only for repair and maintenance rather than for producing or processing the final product. Credit was therefore admissible only for the surge arrestors and stationary battery.

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Issues: Whether Modvat credit as capital goods was admissible on the disputed items, namely surge arrestors, MS angles/columns/girders, workshop equipment, and stationary battery.

Analysis: Items used in the factory and falling within the specified description in Rule 57Q(1) were treated as capital goods. Surge arrestors were held eligible because they functioned as components of the transformer and were used in the factory. MS angles, columns and girders were denied credit because they were used as fabrication or construction material in the casing and walls of the cement mill. Workshop equipment used only for repair and maintenance was held not to qualify as capital goods since it was not used for producing or processing the final product. The stationary battery installed in the captive power plant was held eligible because it was used for generation of power directly connected with manufacture of cement.

Conclusion: Modvat credit was admissible only on surge arrestors and stationary battery, and inadmissible on MS angles, columns, girders, and the workshop equipment.

Ratio Decidendi: Goods used in the factory qualify as capital goods only when they fall within the statutory definition and have a direct functional nexus with the manufacture or processing of the final product.

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