Modvat credit on energy-efficiency capital goods upheld where direct physical use in manufacture was not required.

Modvat credit was treated as admissible on capital goods used for energy-saving and power-efficiency purposes because direct physical participation in the manufacture of final goods is not the governing test. The relevant principle is whether the goods are capital goods sufficiently connected with the manufacturing activity in a legally recognised manner, and equipment that improved electricity efficiency and reduced wastage satisfied that standard. The Revenue's challenge therefore failed.

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Issues: Whether Modvat credit was admissible on capital goods used for energy-saving and power-efficiency purposes, even though they did not have direct participation in the actual production or processing of the final goods.

Analysis: The Tribunal noted that the governing law, as stated in the later Larger Bench decision and the Supreme Court authorities relied upon therein, does not require the capital goods to have direct involvement with the final product for credit eligibility. The relevant test is not direct physical participation in manufacture, but whether the goods are capital goods connected with the manufacturing activity in a legally sufficient manner. On that basis, the equipment used to improve electricity efficiency and reduce wastage was treated as eligible.

Conclusion: The Modvat credit claim was held admissible, and the Revenue's challenge failed.

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