TaxTMI Updates e-Newsletter
Jan 18,2012

Modvat credit - inputs used in or in relation to the manufacture - process of manufacture - marketability - testing as part of manufacture - burden of proof on the department to establish marketability

Inputs used in or in relation to the manufacture - testing as part of manufacture - Modvat credit - marketability - process of manufacture - Materials (flexible laminated plastic film and poly paper) used for testing bespoke F&S machines qualify as inputs under Rule 57A and are eligible for Modvat credit. - HELD THAT: - The Court held that Rule 57A must be given a wide construction so as to cover goods not physically incorporated in the finished product but used "in or in relation to the manufacture". Earlier decisions establish that the words "in relation to" widen the scope of "inputs" to include processes and materials integral to rendering the product commercially distinct and marketable. "Manufacture" is complete only when the product is marketable; marketability is a factual enquiry and the department bears the onus of proving marketability prior to the testing stage. Here, each F&S machine was tailor-made to customer specifications and could not be sold or put on the market unless individually tested and adjusted as per the contract. Testing was therefore inextricably connected with the manufacturing process and indispensable to completion and marketability. In the absence of evidence from the revenue establishing that the machines were marketable before testing, the materials consumed in such testing are inputs within the meaning of Rule 57A and entitle the assessee to Modvat credit. [Paras 14, 17, 20, 21, 22]

Testing of the customised F&S machines is part of the manufacturing process; the flexible plastic films/poly paper used in such testing are inputs under Rule 57A and eligible for Modvat credit; impugned orders set aside and appeals allowed.

Final Conclusion: The Supreme Court allowed the appeals, holding that materials used for testing the tailor-made F&S machines form inputs "in or in relation to" manufacture under Rule 57A and qualify for Modvat credit; the High Court's contrary opinion was set aside.