Modvat credit for testing inputs was allowed where scrap from machine testing did not attract Rule 57C.

Modvat credit was held admissible on polypropylene and HDPE granules used to test plastic extrusion machines so that they conformed to customer specifications, because such use fell within the expression "in relation to manufacture" of the final product. The Tribunal also treated Rule 57D as intended to address unintentional scrap arising from the testing process, with the result that Rule 57C did not apply to deny credit. The Revenue's objection was therefore rejected, and the earlier ratio in the assessee's own case was followed.

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Issues: Whether Modvat credit was admissible on inputs used for testing the machinery, and whether Rule 57C could be invoked when exempt scrap resulted from the testing process.

Analysis: The Tribunal found that the issue had already been covered in the assessee's own case and adopted that earlier ratio. It accepted that polypropylene and HDPE granules used to test plastic extrusion machines to ensure conformity with customer specifications fell within the wider expression "in relation to manufacture" of the final product. It also held that Rule 57D was specifically intended to overcome the problem of unintentional scrap and that, for that reason, the operation of Rule 57C stood excluded.

Conclusion: Modvat credit on the inputs used for testing was admissible, and the Revenue's objection based on Rule 57C was rejected.

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