Modvat credit for inputs used in an intermediate product was upheld where the intermediate aided the manufacturing process.

Modvat credit was treated as admissible on raw materials used to make an intermediate flavouring substance that was itself consumed in the assessee's manufacturing process. The Tribunal applied the principle that credit cannot be denied merely because the inputs are used through a separately manufactured intermediate product, where that product is employed in producing or packing the final goods. On that basis, the objection that exemption under Notification No. 217/86 was the proper course was rejected, and the assessee's entitlement to credit was accepted.

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Issues: Whether Modvat credit was admissible on raw materials used in the manufacture of flavouring substance, which was itself used in the appellant's manufacturing process, or whether exemption under Notification No. 217/86 was the proper course.

Analysis: The dispute turned on whether the inputs could be denied credit merely because they were used in making an intermediate product, namely flavouring substance. The Tribunal noted that the controversy was covered by the decision of the Madras High Court holding that inputs used in the manufacture of articles employed in the production or packing of the final product remained eligible for Modvat credit. Applying that principle, the Tribunal accepted that the appellant's claim to credit could not be denied on the footing adopted in the adjudication order.

Conclusion: Modvat credit was held to be admissible, and the objection based on Notification No. 217/86 was rejected, in favour of the assessee.

Ratio Decidendi: Inputs used in the manufacture of an intermediate product employed in the assessee's manufacturing process are eligible for Modvat credit where the governing legal principle does not justify denial of credit merely because the intermediate product is separately manufactured.

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