Modvat credit on pre-notification goods and furnace oil used in ancillary manufacturing processes was held admissible.

Modvat credit was treated as admissible for air-conditioners received before the effective date of Notification No. 11/95-C.E. (N.T.), because the notification was not retrospective and could not withdraw credit for goods already received. Credit was also held admissible on furnace oil used to generate steam for heating patent or proprietary medicines and sterilising empty ampules, because the expression "in relation to" manufacture was read broadly to include preparatory and ancillary processes that directly or indirectly form part of production. The document thus states that both items were eligible for credit on the facts described.

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Issues: (i) Whether Modvat credit was admissible on air-conditioners received before 16-3-1995 in view of Notification No. 11/95-C.E. (N.T.), dated 16-3-1995; (ii) Whether Modvat credit was admissible on furnace oil used for generating steam for heating patent or proprietary medicines and sterilising empty ampules.

Issue (i): Whether Modvat credit was admissible on air-conditioners received before 16-3-1995 in view of Notification No. 11/95-C.E. (N.T.), dated 16-3-1995.

Analysis: The air-conditioners had been received before the effective date of the notification. The notification was not expressed to operate retrospectively, and the exemption or credit-related change could not be applied to goods received earlier. The factual basis accepted by the appellate authority showed that the items were within the relevant period before the amendment took effect.

Conclusion: Modvat credit on the air-conditioners was admissible and the objection based on the notification failed.

Issue (ii): Whether Modvat credit was admissible on furnace oil used for generating steam for heating patent or proprietary medicines and sterilising empty ampules.

Analysis: The furnace oil was used in the manufacturing stream to produce steam, and that steam was then used for heating the medicines and sterilising the ampules. The expression "in relation to" manufacture was construed broadly to cover processes that are preparatory or ancillary to manufacture and which directly or indirectly participate in the manufacturing process. On that basis, the use of furnace oil was sufficiently connected with manufacture.

Conclusion: Modvat credit on the furnace oil was admissible.

Final Conclusion: The disputed items were held eligible for Modvat credit, so the Revenue's challenge to the grant of credit did not succeed.

Ratio Decidendi: Modvat credit is available for inputs or items used in a process that is sufficiently connected with manufacture, including preparatory or ancillary operations, and a later notification cannot be applied retrospectively to deny credit on goods received before its effective date.

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