Reversal of credit not required while clearance of waste and scrap

Forgings (India) Iron & Steel Limited Vs Commissioner of CGST & Excise (CESTAT Kolkata)

CESTAT Kolkata held that as waste and scrap are not manufactured goods the legislature have consciously not made any provisions for reversal of any credit taken on duty paid inputs in case of clearance of waste and scrap

Facts- The issue involved in the present appeal is as to whether the credit attributable to the inputs contained in waste and scraps, which have not been received from the job worker, is required to be reversed or not.

The Appellant is engaged in the manufacture of various steel forgings as per the drawing and specification of customers falling under Chapters 72, 73 & 84 of the First Schedule to the Central Excise Tariff Act, 1985. The Appellant got some of their goods manufactured through job-workers for which they sent inputs/semi-finished inputs from their factory to various job-workers in terms of Rule 4(5)(a) of the Cenvat Credit Rules, 2004, after taking Cenvat Credit on inputs.

The semi-processed/semi-finished inputs after being processed by job workers were returned to the Appellant. It appears to Revenue that there were always shortages in the number of processed inputs received back by the Appellant. The processed inputs were in lesser quantity than the quantity sent for job work. It appeared that the appellant was not reversing Cenvat credit attributable to inputs contained in the material not received back (waste and scraps).

It was alleged that the assessee had never disclosed the exact quantum of goods, which were short-received by them after job work as well as they did not reverse any such amount. Show-cause Notice further observed that a part of the goods sent for job work by the Assessee under Rule 4(5)(a) of Cenvat Credit Rules, 2004, were not returned even after the expiry of 180 days.

Conclusion- In the case of M/s. Rocket Engineering Corpn. Ltd. and in the case of M/s. Emco Ltd. v. CCE, Mumbai, 2008 (223) E.L.T. 613 (Tri.-Mum.), it was held that waste and scrap used at the end of job worker cannot be held to be dutiable in the principal manufacturer’s hands.

Held that the waste and scrap are not manufactured goods whether they are generated at the premises of the principal manufacturer or the premises of a job-worker and the legislature have consciously not made any provisions for reversal of any credit taken on duty paid inputs in case of clearance of waste and scrap and/or, their non-return from the job worker’s premises under the Central Excise Rules, 2002 read with Cenvat Credit Rules, 2002/2004.

FULL TEXT OF THE CESTAT KOLKATA ORDER

The present appeal filed by the Appellant, M/s Forgings (India) Iron and Steel Limited, arises from Order-in-Appeal No.25/Kol.II/2017 dated 25.04.2017 passed by Commissioner (Appeals), Kolkata.

2. The issue involved in the present appeal is as to whether the credit attributable to the inputs contained in waste and scraps, which have not been received from the job-worker, is required to be reversed or not.

3.1 The Appellant, M/s Forgings (India) Iron and Steel Limited, is engaged in the manufacture of various steel forgings as per drawing and specification of customers falling under Chapters 72, 73 & 84 of the First Schedule to the Central Excise Tariff Act, 1985. The Appellant got some of their goods manufactured through job-workers for which they sent inputs/semi-finished inputs from their factory to various job-workers in terms of Rule 4(5)(a) of the Cenvat Credit Rules, 2004, after taking Cenvat Credit on inputs. The semi-processed/semi-finished inputs after being processed by job-workers, were returned to the Appellant. It appears to Revenue that there were always shortages in quantity of processed inputs received back by the Appellant. The processed inputs were in lesser quantity than the quantity sent for job work. It appeared that the appellant was not reversing Cenvat credit attributable to inputs contained in the material not received back (waste and scraps). Accordingly, five (5) Show-Cause Notices were issued covering the period from April, 2011 to March, 2013. It was alleged that the assessee had never disclosed the exact quantum of goods, which were short received by them after job work as well as they did not reverse any such amount. Show-cause Notice further observed that a part of the goods sent for job work by the Assessee under Rule 4(5)(a) of Cenvat Credit Rules, 2004, were not returned even after expiry of 180 days. The five Show-cause Notices have been tabled as under :

Total Rs.17,71,944/-

3.2 It is the case of the Department that the Appellants have not received back the quantity of waste and scrap from the job-workers, which amounts to clearance of the waste and scrap without payment of duty by the job-worker. As the Appellants have failed to reverse the proportionate Cenvat Credit attributable on inputs contained in such waste and scrap, it appears to the Revenue that the Appellant is liable to pay Cenvat Credit of Rs.17,71,944/- under Rule 14 of the Cenvat Credit Rules, 2004 read with Section 11A of Central Excise Act, 1944 for violating the provisions of Rule 4(5)(a) of the Cenvat Credit Rules, 2004. Further, the Appellant is liable for interest and penalty was also proposed under Rule 15 of the Cenvat Credit Rules read with Section 11AC of the Central Excise Act, 1944.

3.3 The Appellant contested the Show-cause notices by filing reply to the same contending that the Appellant manufactured various engineering products mainly used in large scale sectors as per drawing and specification of customers. The goods are tailor made. During the course of manufacture, they are required to remove inputs/or semi-finished goods/partially processed goods to some other job-workers for carrying out various process viz. (i) Machining, (ii) Cutting, (iii) Grinding, (iv) Heart Treatment, (v) Normalizing, (vi) Bending, (viii) Teeth Cutting, (viii) Ring Cutting, as their factory is not equipped with all such machineries. For sending materials to job-workers, they used Annexure II Challan as prescribed under erstwhile Central Excise Rule 57F (4) and now under Rule 4(5)(a) of Cenvat Credit Rules, 2004.

3.4 During the course of cutting, machining, teeth-cutting, ring rutting, polishing, some scraps are generated in the job-workers’ premises and not returned back to the factory of the Appellant, but retained by job-workers. It is the submission of the Appellant that proper records of such materials is maintained in Annexure IV (Account of removal of input or partially processed goods under Rule 4(5)(a) and / or Notification No.214/86-CE dated 25.03.1986) register party-wise and end of each month, the quantity of scrap not received back, is calculated and duty is paid on such scrap. It was further contended that as required under Rule 4 (5)(a) of Cenvat Credit Rules, 2004 read with Rule 57AC (v) of Central Excise Act, 1944, the Appellant has received back the processed inputs in its factory within 180 days and hence, there was no violation of the Act and the Rules as there is no obligation on the Appellant to bring back the waste and scrap. It was further contended that after enactment of new Central Excise Rules w.e.f. 01.04.2000, no such provision is made requiring principal manufacturer to reverse/pay Cenvat Credit on waste and scrap generated at job-workers’ premises. It was further contended that under Rule 4(5)(a) of Cenvat Credit Rules, 2002/2004, inputs/capital goods after being partially processed, can be sent to a job-worker for various purposes, like, further processing grinding, teeth cutting, bending, ring cutting, testing etc. and only condition imposed under the Rule that the Appellant shall satisfy, is that the processed goods are received back within 180 days. Further reliance was placed on the ruling in the case of Fag Engineering (I) Ltd. Vs. Commissioner of Central Excise, Vadodara : 2011 (266) ELT 193 (Tri.-Ahmd.).

3.5  All the five Show-cause notices culminated into the Order-in-Original dated 31.12.2013, observing that there is no material change in respect of the provisions for job-worker in the Rules prior to 01.04.2000 or subsequent to it under the Central Excise Rules, 2000. It was further held that Rule 4(5)(a) of Cenvat Credit Rules, 2004 also requires that if goods sent for job-work are not received back within 180 days, then the manufacture shall pay the amount equivalent to Cenvat Credit attributable to the inputs and the manufacturer can pay Cenvat Credit again, when the inputs or capital goods are received back in the factory. Accordingly, the contention of the Appellant was not found tenable and the proposed demand of Rs.17,71,944/- was confirmed along with interest and penalty equal to 50% of Rs.17,71,944/- was imposed under Rule 15 (1) of Cenvat Credit Rules, 2004 read with Section 11AC (1)(b) of the Central Excise Act, 1944.

4. Being aggrieved, the Appellant preferred an appeal before the Commissioner (Appeals), who vide the impugned order, upheld the Order-in-Original dated 31.12.2013.

5. Being aggrieved, the Appellants have preferred the appeal before this Tribunal on the ground among others that the findings of the Commissioner (Appeals) is erroneous in observing that there is no material change in the provisions with respect to job worker as existed prior to 1-4-2000 inasmuch as in the old Rule 57F(5)(i), waste and scrap arises in the course of processing of inputs at the place of job worker was required to be returned to the factory of the assessee and where such waste and scrap was not returned, the assessee was required to pay excise duty on such waste and scrap as per such Rule 57F(5)(ii) of the Central Excise Rules, 1944. Whereas there is no such stipulation in the new Rule w.e.f. 1-4-2000 read with Rule 4(5)(a) of the Cenvat Credit Rules. Further, non-incorporation of Rule 57F(5) of erstwhile Central Excise Rules, 1944 in the Cenvat Credit Rules, 2002/2004, clearly manifests that the Legislature had intentionally omitted the said provisions. ‘Thus, the waste and scrap generated at the job-worker’s place should be returned to the assessee and in case waste and scrap is not returned, duty should be paid as were in existence prior to 1-4-2000.’ It is further urged that this position has been clarified by the Board vide Circular dated 3-4-2000 (supra), wherein paras 5 and 6 of the said Circular read as follows :-

“5. Some doubts have been raised whether Cenvat credit would be admissible on the part of the input that is contained in any waste, refuse or bye product. In this context it is clarified that Cenvat credit shall be admissible in respect of the amount of inputs contained in any of the aforesaid waste, refuse or bye product. Similarly, Cenvat should not be denied if the inputs are used in any intermediate of the final product even if such intermediate is exempt from payment of duty. The basic idea is that Cenvat credit is admissible so long as the inputs are used in or in relation to the manufacture of final products, and whether directly or indirectly.

6. A specific provision has now been made if the inputs or capital goods are cleared to a job worker. It has been provided that they should be received back within 180 days. If they are not received, the manufacturer shall debit the Cenvat credit attributable to such inputs or capital goods, otherwise it will be an offence. However, the manufacturer shall be entitled to take Cenvat credit as and when the goods sent to the job worker are received back. If part of the goods are received back within 180 days and the rest of the goods are received back after 180 days, the obligation for debiting the credit shall arise only in respect of Cenvat credit attributable to that part which is not received within 180 days.”

6. The purport of the clarificatory circular is that the processed inputs are required to be received back from the job worker and any waste and scrap generated in the premises of job-worker are not required to be received back and accordingly credit of duty availed in respect of such inputs contained in the waste and scrap so generated cannot be denied.

7. From the above discussion, it becomes clear that duty is being demanded by treating them as a manufacturer of waste and scrap, which is factually incorrect. The present provisions of Rule 4(5)(a), when compared with erstwhile Rule 57F(4) of Central Excise Rules, 1944, makes a clear distinction, inasmuch as the said Rule nowhere requires the return of waste and scrap generated at the job worker’s end. The issue stands settled by the Tribunal’s decision in the case of M/s. Rocket Engg. Corpn. Ltd. v. CCE, Pune as reported in 2006 (193) L.T. 33 (Tri.-Mum.). By relying upon the Tribunal’s decision in the case of M/s. International Tobacco Co. Ltd. v. CCE, Ghaziabad, 2004  (165) E.L.T. 314 (Tri.-Delhi), it was held that when no process of manufacture of waste and scrap has taken place at the end of principal manufacturer, duty cannot be demanded from the principal manufacturer. The said decision of the Tribunal in case of M/s. Rocket Engg. Corpn. Ltd. stand confirmed by Hon’ble Bombay High Court as reported in 2008 (223) E.L.T. 347 (Bom.), when the appeal filed by CCE was rejected. The said decision being a short judgment, is reproduced below for sake of reference.

^„„Heard rival parties.

2. Learned Counsel appearing for the appellant contends that following substantial question of law arises for consideration of this Court. –

A. “Whether the assessee i.e. the supplier of inputs to the job worker is liable to pay Central Excise Duty on the scrap generated at the job worker end, which is not received back from the job worker within the specified time in terms of Notification No. 214/86-C.E., dated 25- 3-1986 as amended r/w Rule 4(5)(a) of Cenvat Credit Rules?”

B. “Whether scrap generated at the job worker end out of the processing of the inputs is required to be returned to the supplier and, if it is not returned back whether the supplier of inputs is required to pay appropriate Central Excise thereon?”

3. Having heard rival parties and having examined the findings recorded in the order in original, it is not in dispute, that the assessee had paid duty on the scrap generated at the factory of the job worker for the period April 1999 to March 2000. There is no liability on the principal manufacturer-respondent after 31st March 2000 in view of amended Rule 57AC of the Cenvat Credit Rules. In view of this finding of fact, no substantial question of law arises in this appeal. Appeal is, therefore, dismissed in limine with no order as to costs.”

8. The Ld.Departmental Representative appearing on behalf of the Revenue, justified the impugned order and prays that the appeal filed by the Appellant be dismissed being devoid of merit.

9. Heard both sides and perused the appeal records.

10. The issue having been decided in the case of M/s. Rocket Engineering Corpn. Ltd. as also in the case of M/s. Emco Ltd. v. CCE, Mumbai, 2008 (223) E.L.T. 613 (Tri.-Mum.), laying down that waste and scrap used at the end of job worker cannot be held to be dutiable in the principal manufacturer’s hands, I am of the view that the duty confirmed against the appellant is not justified. Further, the Tribunal’s decision stand upheld by Hon’ble High Court of Mumbai as detailed supra. There is no contra decision shown to me.

11. I find that the waste and scrap are not manufactured goods whether they are generated at the premises of the principal manufacturer or at the premises of job-worker and accordingly, the legislature have consciously not made any provisions for reversal of any credit taken on duty paid inputs in case of clearance of waste and scrap and/or, there non-return from the job worker’s premises under the Central Excise Rules, 2002 read with Cenvat Credit Rules, 2002/2004.

12. In view of the above, I set aside confirmation of demand of duty, interest and imposition of penalty upon the Appellant by holding that the Appellant was under no obligation to pay duty on waste and scrap used at the job worker’s end.

13. Thus, the appeal filed by the Appellant is allowed with consequential relief, if any, as per law.

(Pronounced in the open court on 17.11.2022)