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Manufacture by Job-worker Availing Exemption-Allowability of Cenvat Credit:

The issue dealt herein is with respect to the availability of cenvat credit for inputs or input services to a job worker who utilizes such inputs for manufacture of goods for the principal manufacturer who uses or further utilizes such goods in the manufacture of final product after its clearance by the job worker under exemption taking benefit of notification 214/86-CE.

The excise authorities deny such input or input service credit to the job worker by reference to Rule 6 of the Cenvat Credit Rules, 2004 on the ground that the input credit is not admissible as the same are used for the manufacture of exempted goods. SCN may be issued for irregular availment of cenvat credit and its recovery besides imposition of penalty. It is in fitness of the things that the assessee makes the authorities aware of the correct position of law in the first instance avoiding the grueling exercise of litigation.

Relevant Rule 6 of Cenvat Credit Rules, 2004 and Exemption Notification 214/86-CE dated 25th of March, 1986:

Rule 6 read with sub-rules 1 to 3 do not permit the credit of cenvat where the input or input services are used in the manufacture of exempted goods. Further, it provides for the maintenance of separate accounts of inputs or input services if both dutiable and exempted goods are being manufactured and take credit in respect of that input or input services which are being utilized in the manufacture of dutiable final products or taxable services. In the event of the manufacturer not keeping separate accounts or opting for the same then at the time of clearance of such exempted goods he is required to debit the cenvat credit relating to the input or input services at ten percent of the sales price of the exempted goods that are cleared from his factory or reverse such credit if the exempted goods fall under the specified chapters. 

The stand of the department is to be contested and the reversal of credit cannot be held lawful.

The goods which are manufactured on job work basis when cleared to the principal manufacturer who ultimately pays duty then the same though cleared under exemption or without payment of duty are not to be treated as exempted goods under Cenvat Credit Rules, 2004 as the duty is finally paid on these goods by the principal manufacturer. There is a favorable judgment of the larger bench -(2005)183 ELT 353 (Tribunal Larger Bench) and one made in by CCE Vadodra-I V. J. H. Kharawala (P) Limited-2009 (235) 332 of the CESTAT Ahmadabad Tribunal also on this very specific point.

The above judgment makes reference to the decision of the larger bench in the case of the Sterlite Industries (I) Limited V. CCE Pune-(2005) 183 ELT 353 which had been accepted in the said judgment delivered by the CESTAT Vadodra on the plea that if the facts of the larger bench are applicable to the present case then there is no reason to differ from the judgment and any Authority is not precluded from relying on the same.

The department disallowed the cenvat credit and proceeded to recover the same under Rule 6(1) of Cenvat Credit Rule, 2004 as the said rule provides credit of cenvat shall not be allowable except in circumstances mentioned in rule 6(2) by maintaining separate accounts. Rule 6(2) if is attracted then exempted goods have to be cleared on payment of amount specified under Rule 3(b) of Cenvat Credit Rules.

The assessee was using cenvat credit in respect of inputs purchased and used in the manufacture of H. Acid an exempted product of the principal manufacturer and department contended that no credit of cenvat can be allowed as the same is used in the manufacture of exempted product being H. Acid manufactured on job basis and cleared without payment of duty under Notification No. 214/86-CE. But the authorities below also held that when the job worker clears the goods manufactured on job work basis free of duty he same is subject to the condition that the manufacturer of the final product shall pay the relevant duty thereon. Therefore there is no case of exemption of duty as pleaded by the department to disallow the credit. The decision of larger bench in Sterlite case that lay down that goods manufactured on job basis cannot be considered as exempted goods because the principal manufacturer has to pay the duty on the same holds the field.  

It is important to note that appeal against Sterlite case by the department which followed Apex Court ruling that goods cleared at intermediate stage are not at par with clearing of final goods without payment of duty had been dismissed by the Bombay High Court. Credit is admissible or permissible to the job worker or even to a manufacturer at intermediate stage in respect of inputs and the cenvat scheme is aimed at reducing the cascading effect of duty and the relevant judgment in the case is that of CCE Ludhiana V. Jainsons Wool Combers Ltd. (2011) 268 ELT 360 (P&H)-C.E. Appeal No.202 of 2010 decided on 7th of February, 2011 which held that the inputs used by job worker in manufacture of intermediate goods and duty is paid by the principals on final goods then the credit is not deniable by holding that inputs were used in the production of duty free goods. (Rule 3, 4 of Cenvat Credit Rules, 2004)

The decision of Sterlite was maintained by Bombay High Court in (2009) 244 ELT A89 and was followed by various Tribunals and High Courts which dwelt on 57E, 57F and 57C of Central Excise Rules 1944. It laid down that modvat credit of duty paid on inputs used in the manufacture of final product that are cleared without payment of duty for further utilization in manufacture of final product which are cleared on payment of duty by principal manufacturer shall not be hit by provisions of Rule 57C of erstwhile C. E. Rules, 1944 which rule debars taking of modvat credit in respect of inputs used in production where such the final product is exempt.

The judgment above mentioned was relied by Tribunal Delhi in (2006) 205 ELT 884 and (2007) 218 ELT 460 (Tribunal-Delhi), was followed in (2008) 226 ELT 591, relied upon in (2010) 261 ELT 1015 (Tribunal-Delhi) which also referred to Bombay High Court judgment in (2009) 244 ELT 337 besides various other Tribunals in large number of cases. The department’s C. E. Appeal No.76 2008 was rejected by Bombay High Court on 13-8-2008.

In fact the judgment of the Larger Bench in Sterlite case was based on the Supreme Court’s judgment in the case of Escorts Limited, Delhi 2004 (171) ELT 145 (SC) which had held that Cenvat/Modvat credit of duty paid on inputs used in manufacture of product cleared without payment of duty by a job worker for further utilization in manufacture of final product which are cleared on payment of duty by principal manufacturer is not hit by rigours of Rule 57C of the erstwhile Central Excise Rules, 1944 and mechanical application of Rule 57C should be avoided which destructs the basic benefit intended to be extending to the assessee.

Further the whole issue before the Apex Court in Escorts Ltd’s case in respect of inputs that were tractor parts manufactured and cleared to another factory belonging to the assessee under exemption for use in the manufacture of tractor on which duty was paid and it was held by the Supreme Court that the tractor was the final product and not the parts and the credit taken on inputs utilized in latter could not be denied read with Notification No.217/86 further read with Rules 57A, 57C and 57D of the erstwhile Central Excise Rules, 1944.     

The decision to that effect was also laid down in the Collector of Central Excise New Delhi V. Hindustan Sanitaryware & Industries- (2002) 145 ELT 3 where it was held with respect to the said notification 217/86-CE dated 2nd of April, 1986 that so long as duty is paid on the final product, the mere fact that duty is not paid on the intermediate product would not disentitle the manufacturer from the benefit of said notification.

Earlier contentions and defenses of the assessee that the exempted final products are not sold therefore manufacturers were not required to reverse the duty under C EX. Rules 1944 as per Indian Smelting & Refining Co. Ltd. 2003-(57) RLT 948 and Balarpur Industries (2002) 48RLT221 are brought to naught in the judgment of Supreme Court but these were based somewhat on different issues with regard to value of exempted goods for the purpose of reversal which SC referred to in C.C. Ex. Nagpur V. Ballarpur Industries Ltd. which was referred to the provisions of law as per S.4 of C. Ex. taking in its sweep the stock transfers also .

V. K. KALIA

FCA, DISA-ICAI

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