Captive use of nitrogen gas as an intermediary input justified Modvat credit for capital goods under the governing test.

Nitrogen gas generated and wholly captively consumed in the manufacture of refractory bricks qualified for Modvat credit as capital goods under Rule 57Q, because the governing test is whether the goods function as intermediary goods in the manufacture of the final product and are not sold by the assessee. The scope of intermediary goods is not limited to by-products, and credit cannot be denied merely because the product is deliberately manufactured. On the admitted facts, the nitrogen gas was never sold and was necessary for manufacture of the final dutiable product, so the Revenue's objection under Rule 57R(1) failed.

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Issues: Whether a Nitrogen Gas Generator used to produce nitrogen gas captively consumed in the manufacture of refractory bricks qualified for Modvat credit as capital goods, or whether the benefit was denied on the footing that nitrogen gas was a final product and not an intermediary good.

Analysis: The governing test under Rule 57Q and Rule 57R is whether the goods are used as intermediary goods in the manufacture of the final product and are not sold by the assessee. The scope of intermediary goods is not confined to by-products alone. Where the generated product is wholly captively consumed and is necessary for manufacture of the final dutiable product, the credit cannot be denied merely because the product is consciously produced. On the admitted facts, the nitrogen gas was never sold and was required in the manufacture of the final product.

Conclusion: The Nitrogen Gas Generator was eligible for Modvat credit as capital goods, and the Revenue's objection under Rule 57R(1) failed.

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