Modvat credit on process oils allowed where inputs were used in relation to manufacture, and penalty was reduced.

Modvat credit was treated as admissible for tempering oil and cutting oil under Rule 57A because both were used directly in the manufacturing process and in relation to manufacture of the final product, even though they were not used as fuel. The disallowance for those items was set aside. As the appeal succeeded only in part, the penalty was correspondingly reduced. The remaining disallowance relating to the unpressed item was left undisturbed. The stated principle is that an input qualifies for Modvat credit when it is used in relation to manufacture, not merely when it functions as fuel.

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Issues: (i) Whether Modvat credit was admissible on tempering oil and cutting oil under Rule 57A of the Central Excise Rules. (ii) Whether the penalty required modification in view of the partial success of the appeal.

Issue (i): Whether Modvat credit was admissible on tempering oil and cutting oil under Rule 57A of the Central Excise Rules.

Analysis: The oils were shown to be used directly in the manufacturing process of the final product. Tempering oil served as a heat transfer medium in tempering, and cutting oil was used during slot cutting to obtain a proper and smooth slot. On these facts, both items were found to be used in relation to manufacture and not excluded merely because they were not used as fuel.

Conclusion: Modvat credit on tempering oil and cutting oil was admissible and the disallowance was set aside for those items.

Issue (ii): Whether the penalty required modification in view of the partial success of the appeal.

Analysis: Since the appeal succeeded in part, the penalty was correspondingly scaled down.

Conclusion: The penalty was reduced.

Final Conclusion: The appeal succeeded on the substantive credit issue for the two oils and the penalty was reduced accordingly, while the disallowance relating to the unpressed item remained undisturbed.

Ratio Decidendi: An input is eligible for Modvat credit if it is used in relation to the manufacture of the final product, even if it is not used as fuel.

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