Job Work: Better late than never
CA Pradeep Jain
Sukhvinder Kaur, LLB
In this article, we are discussing the issue of eligibility of a jobworker in availing cenvat credit on inputs used by him in the manufacture of goods on jobwork basis. We have already written two articles on this issue. The first titled “Jobwork, Cenvat & Litigation-Good Job for Consultants” is already available on our website www.capradeepjain .com. In this article, we have discussed how the large demands have been created by the department under Rule 6 of Cenvat credit Rules. These huge demands, if confirmed, will lead to closure of the units. We have also discussed the various grounds available to assessee to fight this case. In the last, we came to the conclusion that these demands have created a very good job for consultants.
Thereafter, in second piece namely “Job Work and Reversal: All is well...” we have discussed in depth and told that all the grounds raised by the manufacturer were struck down by Higher forum. The Mumbai High Court decision has created havoc in the minds of the job workers. Later on larger bench decision in case of Sterlite Industries was upheld by the Mumbai High Court and relief was granted to the assessee.
Also, there is latest development on this issue. The Board has also come to rescue the poor manufacturers. There is proposal to amend the Rule 6 retrospectively and allowing thereby the benefit of proportionate reversal since inception of this Rule or even erstwhile Rule 57CC.
Further also, the Board has called the opinions from the field formalities to give their opinion as to amend the Rule 6(5) to provide that there is no need of reversal of Cenvat credit on inputs or input services if these are used in job work. We are throwing light on these latest developments in this article.
Start of the Controversy: -
To begin with, we are once again giving the brief idea about this controversy to the netizens for better understanding. Rule 6 of the Cenvat Credit Rules, 2004 provided that the cenvat credit will not be admissible on the inputs or input services which are used in the manufacture of exempted goods or which are used in providing the exempted services. The Rule 6 ibid also said that if the common inputs are used for manufacture of dutiable and exempted goods and the manufacturer is not able to maintain separate inventory then he has to reverse the cenvat credit at specified rate.
Controversy started in case of a job worker undertaking to manufacture goods on jobwork basis on behalf of the Principal Manufacturer. The jobworker would avail the benefit of Notification No. 214/1986-CE dated 25.03.1986 to remove the goods after processing without payment of duty. The Principal Manufacturer has undertaken the duty liability as per impugned notification and declare that the goods so cleared by the job worker will be further used by him in manufacture of his final products which will be cleared on payment of duty.
The job worker was taking cenvat credit on minor inputs/input services like oil, lubricants, telephone service used by him while manufacturing of goods on jobwork basis, the Department raised objection on availing of credit on the ground that he was clearing exempted job work goods. The department raised the demand under Rule 6 and asked the job worker was required to pay an amount equivalent to 8%/10% of the sale value of exempted goods/exempted services. This was very harsh action by the department. In one of cases to which authors of this article has come across will show the high handedness of the department. The credit taken on common inputs was only Rs. 30, 000 but the demand raised was around Rs. 65 lakhs. Thus, havoc was created in the industry and especially amongst the jobworkers.
But the relief was granted by the Larger Bench of the Tribunal in case of Sterlite Industries (I) Ltd v/s Commissioner of Central Excise, Pune [2005 (183) ELT 353 (LB)]. The highest Tribunal in cases of Excise and Customs held that credit was admissible on the inputs used by the jobworker in processing goods on the ground that these are not exempted goods and duty was ultimately being paid on the clearance of finished goods. This decision has been given by the larger bench by applying the principles laid down by the Hon’ble Supreme Court in the case of Escorts Ltd. [2004 (171) ELT 145 (SC)]. The department into appeal against the decision of larger bench but the same has been set aside by the High Court of Mumbai. As such the relief was granted to the poor job workers.
New Developments: -
1. Retrospective amendment in Rule 6:-The first development was that this year budget has brought a retrospective amendment under Rule 6 of the Cenvat credit rules. There is provision of proportionate reversal is available under rule 6(3A). It was not available earlier. It is being incorporated since inception. Even it is being incorporated in old rules. Thus, if the manufacturer does the proportionate reversal and gives the certificate of Chartered Accountant then old demands will also be dropped. This is very welcome move by the Board. This will end the unnecessary litigation. It will be applicable not only to job workers but also to the others who are in fact manufacturing exempted and dutiable goods. If they do the proportionate reversal then the demands will be dropped.
But there is problem for the job workers in this scheme. The principal raw material is being supplied by the principal and they are not taking the credit on the same. They are taking the credit on small consumables like oil, lubricants and on small input services like telephone or mobile phones etc. But the reversal formula takes into account the credit taken on all inputs. This will also include the credit on raw material which is manufactured by him on his own account though these are not common inputs for the transaction of job worker. Thus, this amendment is not feasible for the job workers.
2. Proposal to amend rule 6(5):-The Board had vide its letter F. No. 267/12/2010-CX.8, dated 18.02.2010 asked the field formations to inform about the practice followed in respect of clearances by job worker without payment of duty under their jurisdiction. They have also been requested to give their opinion/views on the issue referring the legal provisions, judicial pronouncements etc. They are also required to furnish the details of any SCN/appeal pending on the issue.
The Board has asked for the said information as they have been asked to extend the benefit of Rule 6 (6) of the Cenvat Credit Rules, 2004 for the clearances made by the job worker. The Rule 6(6) reads as follows:-
(6) The provisions of sub-rules (1), (2), (3) and (4) shall not be applicable in case the excisable goods removed without payment of duty are either-
(i) cleared to a unit in a special economic zone or to a developer of a special economic zone for their authorized operations; or
(ii) cleared to a hundred per cent. export-oriented undertaking; or
(iii) cleared to a unit in an
(iv) supplied to the United Nations or an international organization for their official use or supplied to projects funded by them, on which exemption of duty is available under notification of the Government of India in the Ministry of Finance (Department of Revenue) No.108/95-Central Excise, dated the 28th August, 1995, number G. S R. 602 (E), dated the 28th August, 1995; or
(v) cleared for export under bond in terms of the provisions of the Central Excise Rules, 2002; or
(vi) gold or silver falling within Chapter 71 of the said First Schedule, arising in the course of manufacture of copper or zinc by smelting; or
(vii) all goods which are exempt from the duties of customs leviable under the First Schedule to the Customs Tariff Act, 1975 (51 of 1975) and the additional duty leviable under section 3 of the said Customs Tariff Act when imported into India and supplied against International Competitive Bidding in terms of notification No. 6/2002-Central Excise dated the 1 st March, 2002 or notification No. 6/2006-Central Excise dated the 1 st March, 2006, as the case may be.
Thus, it provides an exception where the Rule 6 does not apply. Hence, they will include the job work under the same and there will not be any need to reversal and the credit will be available to the job worker. This is very welcome step taken by the Board. This will resolve the complete issue. The only thing we want to say is that the same should be done with retrospective effect as done in case of reversal of Cenvat credit. Otherwise, the field formation will confirm the demands of old periods. Secondly, it should be done at the earliest so that no further demands are being raised.
Furthermore, if it takes time to do this amendment then the Board may ask the departmental adjudication officers to follow the decision of larger bench of tribunal in case of Sterlite Industries which has been upheld by the High Court also. This will resolve the issue at the earliest.
Thus, it can be said that this whole controversy is leading towards the happy ending. The department is also willing to resolve the issue. The real proverb applies to this case is “Better late than never”.
However, we would like to add here that approach at Board level has also changed. We have seen the retrospective amendment to give refund of unutilized credit to exporters. Secondly, retrospective amendment for proportionate reversal for manufacturing using common inputs for dutiable and exempted goods. Next example of positive thinking is that the Board has asked views of all commissioners to resolve the issue of job worker. We shall all appreciate this positive approach of the Board. We also pray to God to continue the same.