JOB WORK AND REVERSAL: ALL IS WELL……..
SUBMITTED BY: -
CA PRADEEP JAIN
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The controversy on job work vis-à-vis reversal of Cenvat credit under Rule 6 is still going on. We have already written an article on the subject “JOB WORK- GOOD JOB FOR CONSULTANTS”. There are many developments in this regard and we are bringing the same through this article. This issue has given rise to huge demands and as such the industry is also very much worried for the same. The credit taken on common inputs is very small but the demand is very huge. The authors of this article have come across the situation where the credit taken on common inputs was only Rs. 30,000 but the demand raised was around Rs. 65 Lakhs. Thus, it has created havoc in the minds of industrialists. Even the defenses taken in reply of such demands were struck down by the tribunal or Courts one by one. Thus, assessees facing such demands were under very difficult situation. The only way was available with them was to say “ ALL IS WELL” as said by the AMIR KHAN in his latest movie “3- IDIOTS”.
THE ISSUE: -
The manufacturer takes the credit on the inputs and manufacturers his final products. He also undertakes the job work for the other manufacturers. The other manufacturer sends the goods under Notification no. 214/86-C.E. dated 01.03.1986 or under Rule 4(5)(a) of Cenvat credit Rules. The job worker processes the goods and sends back the finished goods to the other manufacturers. The principal raw material is supplied by the other manufacturer to the job worker. But the job worker uses certain inputs in the manufacture of these goods. The department is alleging that the common inputs are used in manufacture of their own final product as well as in the manufacture of exempted job work goods and as such the Rule 6 is invoked. Since the job worker has not maintained the separate inventory as well as done the proportionate reversal under Rule 6(3) (a) of Cenvat credit Rules and as such they have to reverse the Cenvat credit @ 10% or 5% (prevailing at relevant time) of the value of exempted goods.
The demand has been raised by the Authorities in the past and there are different defenses on which the respondents have relied. The same are stated as under: -
1) Sale price is not available:- The one of the defence available to these demands was that the reversal of cenvat credit cannot be done as the sale price of job work goods is not available. According to the Rule 57 CC of erstwhile CENVAT Credit Rules, 2004, the reversal of CENVAT Credit is to be done on the "Sale Price" of the exempted goods. But the goods are not sold but only job charges are being charged. As the goods are not sold and as such the demand is not sustainable. Reliance was placed on the following Case Laws generated as under: -
a. Indian Smelting & Refining Co. Ltd. & ANR. v/s CCE, Mumbai [2003(57) RLT 948]:-
“Modvat/Cenvat – Adjustment – Same input used in producing goods sold on payment of duty as well as cleared under exemption on job work basis – Held: As exempted final product was not sold manufacturer was not required to pay 8% duty under Rule 57CC of erstwhile Central Excise Rules, 1944.”
b. Ballarpur Industries v/s CCE [2002 (48) RLT 221]:-
Stock Transfer – Pulp transferred to another factory of the same manufacturer for use in manufacture of paper – exempted from duty – Rule 57CC(1) not applicable as it contemplates sales and there is no sale in case of stock transfer from one unit to another of the same manufacturer – moreover, sale price charged by another unit of the manufacturer for comparable goods (pulp) is not adopted as Rule 57CC contemplates sale price charged by the manufacturer for sale of such goods and not sale price of comparable goods – reversal of Credit @ 8% of the value based on cost of production in terms of Rule 6(b)(ii) of C. Ex. (Valuation) Rules, 1975 in respect of inputs contained in exempted pulp cleared to another unit for captive use, is upheld – demand and penalty set aside.”
Following the same, it was pleaded that there is no need of reversal of Cenvat credit. But the Supreme Court in its verdict of Commissioner of central excise, Nagpur Vs. Ballapur Industries Limited [2007 (215) E.L.T. 489 (S.C.)] disallowed this contention. The Highest Court of India held that the Rule 6 is applicable even if the sale price is not available. The gist of the case is as follows: -
“Applicability of Rule 57CC of erstwhile Central Excise Rules, 1944 in absence of sale — Rule 57CC ibid is a provision which seeks to recover presumptive amount @8% of price of exempted final goods at the time of removal for sale — Rule applicable to stock transfers also — Rate of 8% is the measure to calculate the presumptive sum — Entire rule is based on “deemed price” and “recovery of presumptive amount” hence, the words “price charged at the time of sale” must be read as “eight per cent of the value of exempted goods”
Thus, as per Apex Court decision the duty is payable on the value determined in Section 4 and 4A of Central Excise Act. Thus, this defense is not available to assessee now.
2) Proportionate reversal of Cenvat credit :-Secondly, if proportionate reversal is done by the assessee then the decision of the Apex Court in the case of Bombay Dyeing & Mfg. Co. Ltd. reported at 2007 (215) ELT 3 (SC) will apply. In this case the Hon'ble Supreme Court contended that reversal of Cenvat Credit before utilizing the same; amounts to non taking of Cenvat Credit.
The aforesaid decision was taken into consideration by the Tribunal also and the credit was allowed to the assessee. Some of the cases in which the Tribunal gave similar decision are stated below: -
§ Forbes Gokak Mills Limited vs. Commissioner of C. Ex., Belgaum [2007 (208) E.L.T. 521 (Tri. - Bang.)]
“Inputs used in the manufacture of dutiable as well as exempted goods. Separate accounts not maintained - However, credit availed in respect of manufacture of exempted goods reversed simultaneously - Once credit reversed, it can be said that no input credit had been availed - Condition for non-availment of input credit in respect of Notification No. 30/2004-C.E. satisfied - Benefit of Notification Nos. 29/2004-C.E. and 30/2004-C.E. be extended”
But conversely, the Mumbai High Court has disallowed this contention in a latest decision of Commissioner of Central Excise, Thane v. Nicholas Piramal Industries Ltd. [2009 TIOL 649 HC-MUM-CX]. The relevant part of this decision reads as follows:-
“The provisions of Rule 6 (3) are required to be mandatorily followed. If an assessee doesn’t maintains separate inventories and uses common inputs or input services for manufacturing dutiable and exempted goods, and avails cenvat credit on the common inputs, then he is required to reverse or pay an amount equivalent to 8% of the total price of the exempted final product.”
The aforesaid decision has maintained that the decision of Apex Court in case of Bombay Dyeing is not applicable for erstwhile Rule 57CC of Central Excise or Rule 6 of Cenvat credit Rules. It has held that the option was with the assessee to maintain separate inventory and he should have done the same. Later on, reversal of Cenvat credit does not come to rescue him. There are only two options in the Rule 6 at the relevant time i.e to maintain separate inventory or to reverse the Cenvat credit as per Rules. A case study was also prepared by us on this decision of High Court and being displayed at PJ/ CASE STUDY/ 09-10/21 dated 8.12.09 on our website.
Further, the amendment in Rule 6 from 01.04.2008 allows the proportionate reversal but the reversal takes into account all the inputs whether common or otherwise to do the calculation. Thus, the reversal in such cases is much more than the credit taken on common inputs. Normally it is more than job work charges. Thus, it is better to forgo doing job work rather than doing reversal of Cenvat credit on such job work. Furthermore the formula for reversal is also very difficult. The complete rule takes variables from A to P to do such calculations. Some authors has also pointed out that Ramanujam is required to do this mathematical calculations. Thus, this option is not practically available to the job worker. The small poor job worker cannot do such tedious calculations. Hence, it does not come to rescue to poor job worker.
3) ABSURD RESULTS: - Thirdly, the contention was raised that the application of Rule 6 in case of job work leads to absurd results. As already pointed out in the beginning of this article that in one of the case it was found that the job worker has taken the credit on common inputs ( which are normally oils, lubricants etc.) of Rs. 30,000/- and a demand of Rs. 65 Lakhs were issued to the poor job worker. This was really the absurd result. This shows the unreasonableness of this rule. It was argued that the Rule which leads to absurd results should be struck down.
But this contention was also struck down by the Hon’ble Mumbai High Court in case of Commissioner of Central Excise, Thane v. Nicholas Nicholas Piramal Industries Ltd. cited supra. It has held as under:-
“It is obvious that if inputs are used in the manufacture of exempted goods, credit is not allowed except in the circumstances mentioned under sub-rule (2). A manufacturers who avails of the Cenvat credit in respect of inputs used in the manufacture of final products which are chargeable to duty as also exempted goods, the manufacturer has to maintain separate accounts for receipt, consumption and inventory of inputs meant for use in the manufacture of dutiable final products and the quantity of inputs used for manufacture of dutiable final products and the quantity of inputs used for the manufacture of exempted goods and takes cenvat credit only on that quantity of inputs which are used in the manufacture of dutiable goods. A plain reading of this rule does not lead to any ambiguity, absurdity or defeat the provisions of the Act.”
Thus, the contentions raised by the job workers in their reply are going against them. The Courts have given verdict against their contentions. This was leaving no option with the job worker. It is creating panic in his mind. Thus, the poor job worker has to build his confidence by saying “ALL IS WELL” as Amir Khan said in the movie when he is facing any problem.
4. Duty is paid ultimately:-This contention was also raised in reply to such demands. As ultimately the principal is paying the duty on the goods hence the CENVAT chain should not be broken and credit should be allowed to the job worker. This can be backed by the following case laws: -
a. Jindal Polymers v/s CCE [2002(43)RLT680]:-
“Polyester/Polymer chips manufactured on job work by assessee using credit on inputs, cleared without payment of duty to the parent manufacturer for manufacture of Polyester/Polymer filament yarn under Notification No. 214/86-C.E. - Polyester/Polymer filament yarn being chargeable to duty, Modvat credit available on inputs - Rule 57F(4) of the Central Excise Rules, 1944.”
b. Shakti Insulated Wires Ltd. v/s CCE & C, Mumbai-V [2002 (51)RLT 115]
“Inputs sent by principal manufacturer to job worker returned to principal manufacturer after process, whether entitled to Modvat in respect of inputs used by him – Inputs manufactured by job worker consumed for manufacture of final products whether cleared by the job worker or by the principal manufacturer, job worker is entitled to Modvat Credit – Rule 57Q of erstwhile Central Excise Rules, 1944. “
c. CCE, Chennai v/s M/s UCAL Machine Tools Ltd.-CESTAT, Chennai [2006 (74) RLT 511 (T.)]:-
“It was observed that, in the special procedure laid down under Rule 57F(3), duty did not get paid at the job worker’s end at the time of clearance of goods, but ultimately got paid at the principal manufacturer’s end. In other words, assessable value of the goods cleared by the job worker without payment of duty to the principal manufacturer would ultimately become an ingredient of the assessable value of the final product cleared by the latter on payment of duty. Thus, duty gets paid on the job-worked goods at a later stage and, therefore, such goods cannot be categorized as “exempted goods” for purpose of Rule 57C or Rule 57R.”
The department has still not accepted this contention even though the Larger Bench of tribunal has supported the contention in the case of “Sterlite components Limited [2005 (183) ELT 353 (LB)]”. It was held in this case as under:-
“Job worker, who received goods from manufacturer under Rule 57E of erstwhile Central Excise Rules, 1944 entitled to take credit of duty in respect of other inputs received directly and used by him in manufacture of said goods on job work basis . Rule 57F ibid is a self contained provision and goods processed under said rule were being returned to principal manufacturer who was paying duty on the same - Rule 57C ibid not attracted in such a situation.”
But the department went to the High Court and did not accept this verdict.
FINAL FAVOURABLE VERDICT: - The outcome of above appeal of department in High Court came in favour of the manufacturer [2009 (244) ELT A89]. Even further, while following the above High Court decision in case TATA MOTORS LIMITED V. UNION OF INDIA [2009(244) ELT337], the High Court has once again granted stay in this matter. At last, this contention was decided in favour of job worker. The job worker felt relieved by this decision. There is no report that the department went further and filed appeal in Apex Court against this decision. Let us hope that long dispute between the job worker and department is resolved.
Conclusion: - We have seen that all the contentions of job worker were going against him then at last one contention has gone in his favour. So, he need not to say “ALL IS WELL” as said in the movie “3 idiots.” But he can proudly rely on old proverb “ALL’S WELL WHEN ENDS WELL.” But let us hope also that the department does not go in the Apex Court and this dispute ends here.