Capital goods for Modvat credit include quality-testing equipment with direct nexus to manufacture and marketable production.

Laboratory testing equipment used to check yarn quality and defects was treated as capital goods for Modvat credit because it had a direct functional nexus with the manufacturing process and was essential for producing marketable goods. Equipment used for quality testing in relation to manufacture can qualify as capital goods where that nexus is established, and Modvat credit was therefore allowable.

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Issues: Whether laboratory testing equipment used for checking yarn quality and defects qualified as capital goods for Modvat credit under Rule 57Q.

Analysis: The testing equipment was used in relation to the manufacture of yarn and had a direct functional nexus with the manufacturing process, since quality testing was essential for commercial production of marketable goods. The earlier decisions relied upon recognized that equipment having such nexus could qualify as capital goods for Modvat purposes.

Conclusion: The equipment was admissible as capital goods and Modvat credit was allowable.

Ratio Decidendi: Equipment used for quality testing that has a clear nexus with the manufacture of the final product can qualify as capital goods for Modvat credit.

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