Kind Attention Job Workers!!!! - Say "NO" to liability on Scrap if generated from an activity not amounting to manufacture
Background:
Generally all Manufacturers are not fully equipped to Process/manufacture a complete product. Therefore to carry out certain intermediate production process they send their raw materials or their semi-processed goods to a job worker. In this regard, the Excise rules have stipulated certain procedures following which the materials or semi-finished goods can be taken out and brought in back to the parent factory. During this intermediate job-work process undertaken by the job worker, scraps gets generated, which as an Industrial Practise are not been taken back by the principal manufacturer. The left out scrap in the job workers place are generally sold out to market for a nominal consideration by the job worker. The Excise department started issuing Show Cause Notices to the Job workers claiming that the Scrap generated suffers excise duty. The reason they stated was that the scrap is an “Excisable Product” covered under the Central Excise Tariff. Even after investing tremendous amount of time and money, the job workers could not go against the order of Excise department as majority of courts in India concluded that the liability of paying duty on scrap vest only on the job worker and not the Principal Manufacturer. In this article, I have identified certain areas and ways where the liability can be avoided by the Job worker when they can prove that the intermediate Job work activity undertaken by them is not a process amounting to manufacture.
Liability of Excise on Scrap:
It is an unknown belief that scrap generated from a job work activity is subject to Excise duty. This is because of availability of separate HS Code for Scrap under the Central Excise tariff.
One must understand that all scraps are not subject to Excise duty whereas Scraps that are generated from a manufacturing activity are alone subject to Excise duty. Before knowing the reasons for it, let us understand certain provisions of Central Excise.
What Chargeable section says?
As per the chargeability section (Section 3) of the Central Excise Act 1944, Excise duty will be levied and collected on all excisable goods that are produced or manufactured in India as per the rates specified under the Central Excise Tariff Act, 1985
What is meant by Manufacture for Excise?
As per section 2(f) of the Central Excise Act, 1944, “Manufacture” includes any process-
i. incidental or ancillary to the completion of a manufactured product;
ii. which is specified in relation to any goods in the Section or Chapter notes of the First Schedule to the Central Excise Tariff Act, 1985 (5 of 1986) as amounting to manufacture; or
iii. which, in relation to the goods specified in the Third Schedule, involves packing or repacking of such goods in a unit container or labelling or re-labelling of containers including the declaration or alteration of retail sale price on it or adoption of any other treatment on the goods to render the product marketable to the consumer;
How waste and scrap defined under Excise?
Note 8(1) to section XV of Central Excise tariff Act define Waste and Scrap as “metal waste and scrap from the manufacture or mechanical working of metals, and metal goods definitely not usable as such because of breakage, cutting-up, wear or other reasons .
After going through the above provisions, it is well understood that Waste and Scrap will attract Excise duty only if the following conditions are satisfied:
- It should be generated from the process of manufacture
- It should be mentioned in the Excise Tariff
This reasoning is also well supported by various legal jurisdictions. Some of them are given below:
Markfed Vanaspati V. CCE 2000(116) LT 204 (CEGAT 3 member bench)
It has been held that waste will be dutiable only if there is ‘manufacture’. It was held that spent earth is not dutiable even if it is marketable and even if it is specified in tariff (as it is not manufactured)
CCE v. Dhillon Kool Drinks 2001(130) ELT 475 (CEGAT)
It was held that waste and scrap arising out of broken bottles through the process of filling/handling etc. neither generated in the course of manufacture of glass bottles nor it could be considered as a manufactured product.
Prism Cement V. CCE (2008) 232 ELT 564 (CESTAT)
Waste like MS scrap, borings, generated during maintenance and repair work is not excisable when the assesse is not involved in the manufacture of iron and steel products and no credit was taken on items used in repair and maintenance.
UOI V. Banswara Syntex (2008)221 ELT 360 (Rajasthan High Court DB)
Waste Material (MS Scrap) of building construction is not dutiable as it did not arise from the manufacturing process
Therefore I strongly conclude that scrap generated from a job work activity, which can be construed as manufacture can only attract excise liability
The Bug does not stop here:
With many more judgement came out to protect job workers from not paying excise duty on scrap generated from activities not amounting to manufacture, the Excise department took the help of its sister concern Service tax department to handle the case on a different angle. The service tax department started issuing Show Cause Notices to job worker indulging in pure service activity to pay service tax on scrap generated from their activity which are not taken by the Principal Manufacture. The reasons provided by them was that the scraps are intentionally not taken back by the Principal Manufacturer as they treat them as an additional consideration given for the job work service received. Still the job worker have a way out to protect themselves which is discussed below.
Avoid Service Tax on Scrap – if Final product at Principal Manufacturer’s place suffers Excise duty
Sl.No.30 of Mega Exemption Notification 25/2012 dated 20th June 2012 as well as the erstwhile exemption notification 8/2005 dated 1st March 2005 exempts the activity of carrying out an intermediate production process as job work in relation to any goods on which appropriate duty is payable by the Principal Manufacturer
The exemption para stated in both the above notifications are reproduced below
Notification 25/2012 – ST dated 20th June 2012 (Applicable from 1st July 2012)
“30. Carrying out an intermediate production process as job work in relation to –
- agriculture, printing or textile processing;
- cut and polished diamonds and gemstones; or plain and studded jewellery of gold and other precious metals, falling under Chapter 71 of the Central Excise Tariff Act ,1985 (5 of 1986);
- any goods on which appropriate duty is payable by the principal manufacturer (emphasis mine);
- processes of electroplating, zinc plating, anodizing, heat treatment, powder coating, painting including spray painting or auto black, during the course of manufacture of parts of cycles or sewing machines upto an aggregate value of taxable service of the specified processes of one hundred and fifty lakh rupees in a financial year subject to the condition that such aggregate value had not exceeded one hundred and fifty lakh rupees during the preceding financial year”
Notification 8/2005 – ST dated 1st March 2005 (Applicable upto30th June 2012)
“ …….hereby exempts the taxable service of production of goods on behalf of the client referred in sub-clause (v) of clause (19) of section 65 of the said Finance Act, from the whole of service tax leviable thereon under section 66 of the said Finance Act:
Provided that the said exemption shall apply only in cases where such goods are produced using raw materials or semi-finished goods supplied by the client and goods so produced are returned back to the said client for use in or in relation to manufacture of any other goods falling under the First Schedule to the Central Excise Tariff Act, 1985 (5 of 1986), as amended by the Central Excise Tariff (Amendment) Act, 2004 (5 of 2005), on which appropriate duty of excise is payable. ……… (Emphasis mine)”
Therefore when the job worker can prove that the final product at the Principal manufacturer’s place suffers excise duty, the job work activity undertaken by him will get qualified for the above said service Tax exemption.
While in this scenario, when the main activity itself is exempted from service tax, whatever amount added as an additional consideration would also get automatically exempted. In this way the value of scrap is also adds up the value of exempted service.
How to prove that the final product of Principal Manufacturer is suffering Excise duty?
I have given my suggestions under two modes:
Tail Mode (No Risk Mode) – Get a declaration from the Principal Manufacturer about the dutiabilty of his final product which help as an evidence when the department officials try to verify the correctness of exemption route
Head Mode (Risk Mode) – When the declarations are not received from the Principal Manufacturer and still if the Job worker feels to claim exemption on the scrap generated, he can argue on the below lines: (An argument oriented point and as its own risk of rejection by the department)
When the materials or semi-finished goods are received through Industrial used 4(5)(a) challan (This is nothing but the challan prepared and sent following the procedures stipulated under Rule 4(5)(a) of CENVAT credit rules), the Job worker can argue as below
Extract of Sub-rule 5(a) of Rule 4 of CENVAT Credit Rules, 2004
“The CENVAT credit shall be allowed even if any inputs or capital goods as such or after being partially processed are sent to a job worker for further processing, testing, repair, re-conditioning, or for the manufacture of intermediate goods necessary for the manufacture of final products or any other purpose, and it is established from the records, challans or memos or any other document produced by the manufacturer or provider of output service taking the CENVAT credit that the goods are received back in the factory within one hundred and eighty days of their being sent to a job worker and if the inputs or the capital goods are not received back within one hundred eighty days, the manufacturer or provider of output service shall pay an amount equivalent to the CENVAT credit attributable to the inputs or capital goods by debiting the CENVAT credit or otherwise…….”
The compliance under Rule 4(5) (a) is required only if CENVAT credit is to be availed on the inputs. Therefore to claim CENVAT credit on the products sent to job worker, the Principal Manufacturers are bringing and taking back the materials within the stipulated period of 180 days through challan 4 (5)(a). With this we can logically conclude that the Principal Manufacturers are availing CENVAT credit and that the final product in relation to which these inputs/components are used suffer excise duty
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