‘Job Work’, ‘Cenvat” and ‘Litigation’ – a combination of these three means “Sky is the limit”. Job work in itself has been a critical area of Central Excise Law. Being already complicated with its own policies and procedures, the existing provisions of Rule 6 of the Cenvat Credit Rules, 2004 have added oil to the fire. This expose is all about the causes, effects and prospective of Job work r/w Cenvat Credit Rules, 2004.
Rule 6 of Cenvat Credit Rules, 2004: An introduction:-
Rule 6 of CCR deals with the Cenvat Credit provisions in case of manufacturer of both dutiable and exempted goods (hereinafter referred as said manufacturer). Sub rule 1 to this rule says that credit is not allowed on that much portion of the inputs/input services that are used for manufacture of exempted goods. Sub rule 2 prescribes that credit will be allowed on common inputs/input services if the said manufacturer maintains separate records for inputs/input services used in manufacture of both dutiable and exempted goods. Sub rule 3 states that if the said manufacturer is unable to maintain separate records, he has to either pay 10% of the value of exempted goods at the time of clearance of such goods or he will have to proportionately reverse the credit attributable to the exempted goods. Clause of proportionate reversal has been inserted w.e.f. 1.4.2008 prior to which there was only one option with the said manufacturer – to pay a value @ 10% of the value of exempted goods. The proportionate reversal referred in sub rule 3 is to be done as per formula given in sub rule 3A of these rules. Similar provisions are there for the provider of taxable and exempted services.
Job Work: An Introduction:-
A job worker is one who process the inputs supplied by principle manufacturer. In case of job work, it is the principle manufacturer who undertakes to use the goods processed by the job worker in the manufacture of dutiable goods and to clear these goods on payment of duty. As such, there is no liability on the job worker even though the process carried on by him amounts to manufacture u/s 2(f) of the Central Excise Act, 1944. There are four procedures prescribed for job work:-
Rule 4(5)(a) of the Cenvat Credit Rules, 2004: Under this rule, Cenvat Credit on inputs and capital goods is allowed even if they are sent to job worker for further processing thereon and are received back within 180 days. If the goods are not received back within 180 days, credit is to be reversed and when goods are actually received, credit can be taken again.
Notification no. 214/1986-CE Dated 25/3/1986: Under this notification, a job worker is allowed to remove the goods after processing without payment of duty on an undertaking being furnished by the principal manufacturer to the Assistant Commissioner of job worker 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 as per provisions of this notification.
Notification No. 83/1994-CE Dated 11/4/1994: This notification prescribes the procedure for goods cleared after job work done in relation to the SSI goods as specified in notification no. 8 & 9/2003-CE dated March 1, 2003 or goods falling under tariff heading 3904 and 8413. These goods will be exempt from duty of excise on furnishing of an undertaking by the principle supplier to the jurisdictional officer of job worker that the goods cleared from the factory of job worker will be used by him in or in relation to manufacture of exempted goods specified in the notifications referred herein. The waste and scrap so generated is also exempt from payment of excise duty subject to certain conditions specified in the notification.
Notification No. 84/1994-CE Dated 11/4/1994: This notification allows the clearance of raw material or semi finished goods as specified in notification no. 8 & 9/2003-CE dated March 1, 2003 or goods falling under tariff heading 3904 and 8413 for getting the job work done at job worker’s place. For clearing the goods for job work, the exemption will be granted subject to the condition that the supplier of the material furnishes an undertaking to his jurisdictional Central excise officer that the goods so cleared for job work after receiving back will be used by him in or in relation to manufacture of exempted goods specified in the notifications referred herein. The waste and scrap so generated is also exempt from payment of excise duty subject to certain conditions specified in the notification.
Many of the manufacturers registered under Central Excise are also engaged in doing job work on behalf of others against certain job charges. In such cases, the main input is supplied by the principle manufacturer which is processed by the job worker by using other petty inputs and consumables required in the course of processing.
Job Work v/s Rule 6:-
In case, the job worker is also manufacturing the goods on his own account and is availing the Cenvat facility and has taken credit of petty inputs and consumables that are used both in manufacture of own goods and goods job worked; provisions of rule 6 are attracted. Since it is very difficult to maintain separate records of inputs and input services commonly used, the department says that the reversal under Rule 6(3) is to be done. The harsh provisions of rule 6(3) of the Cenvat Credit Rules, 2004 comes into play. As such, the job worker has to pay 10% of the value of exempted goods (i.e. goods cleared on job work) or to proportionately reverse the credit as per formula prescribed in sub rule 3A. Since the formula prescribed in sub rule 3A is new and very cumbersome, most of the job workers do not opt the same. As such, show cause notice of huge amounts (@ 10% of goods cleared on job work) is being gifted to them by the department.
The assessee has been defending the demands of reversal of Cenvat credit on many grounds. But the latest position is changing in each ground and it is going against the assessee. We are discussing the same:-
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Cenvat Credit on “inputs intended to be used as fuel”:-
The old provisions contained in Rule 6 (2) of the CCR read as follows:-
“(2) Where a manufacturer or provider of output service avails of CENVAT credit in respect of any inputs or input services, except inputs intended to be used as fuel, and manufactures such final products or provides such output service which are chargeable to duty or tax as well as exempted goods or services, then, the manufacturer or provider of output service shall maintain separate accounts for receipt, consumption and inventory of input and input service meant for use in the manufacture of dutiable final products or in providing output service and the quantity of input meant for use in the manufacture of exempted goods or services and take CENVAT credit only on that quantity of input or input service which is intended for use in the manufacture of dutiable goods or in providing output service on which service tax is payable.”
The use of words “Except fuel” in the language implied that the Rule 6(2) will not be applicable to fuel even if it is used in manufacture of both exempted and dutiable final product. However, vide Notification No. 25/2007-CE (NT), dated 16.05.05, the words “except inputs intended to be used as fuel” where omitted from Rule 6 (2). But that is a separate issue.
Recently, the interpretation drawn for the use of words “except fuel” has been changed by Apex Court in the case of Commissioner of Central Excise v/s M/s Gujarat Narmada Fertilizers Co. Ltd. [2009-TIOL-96-SC-CX]. In this case, it is held that Cenvat credit will not be available on fuel used for exempted final products. It was held that exclusion of fuel inputs from the purview of sub-rule (2) of Rule 6 would not mean that they are automatically excluded from the scope of sub-rule (1) of Rule 6. The legal effect of sub-rule (1) has to be applied to all inputs including fuel-inputs and therefore, credit will not be permissible on such quantity of fuel which is used in the manufacture of exempted goods.
Now, in case of a jobworker who is manufacturing goods on job-work basis on behalf of the principal manufacturer uses fuel-inputs, whether he will be eligible to take credit of such fuel-inputs? The Apex Court decision in case of Gujarat Narmada Fertilizers Co. Ltd. simply denies the same.
“Value” of exempted goods:-
The Rule says that the reversal is to be done on the sale price of exempted goods. It was contented that since the goods cleared after job work were not sold, as such, this clause is not applicable. Cenvat credit was allowed during initial periods by hon’ble Tribunal in the case of Jindal Polymers v/s CCE [2002 (43) RLT 680] and Shakti Insulated Wires Ltd. v/s CCE & C, Mumbai-V [2002 (51)RLT 115]. But the hon’ble Supreme Court has decided against this issue in the case of Commissioner of Central Excise, Nagpur Vs. Ballarpur Industries Ltd. [2007 (215) ELT 489 SC]. As such, now this pleading does not hold good now. Also, the rule 6 has been changed and duty is to be paid on the value determined as per Section 4 and Section 4A of Central Excise Act.
Duty is paid on final product by Principal manufacturer
It is contended by the job workers that the purpose of framing Cenvat provisions is to remove the cascading effect, i.e., to nullify the effect of input stage duty if ultimately duty is paid on the final product. It was submitted that the goods cleared after doing job work are being used by the principle manufacturer who is ultimately paying the duty at the time of clearing the goods after further processing. This resort has applicability only in the cases where the goods are removed after job work under the provisions of rule 4(5)(a) of the Cenvat Credit Rules, 2004 or under notification no. 214/86-C.E., dated 25-3-1986. This contention does not hold good if the job work is done under notification no. 84/86-CE dated 25-3-1986 as under this notification a SSI unit sends the goods on job work. Since, a unit availing SSI exemption does not pay duty at the time of clearance of goods, as such the contention that ultimately duty is being paid on the final product is not applicable here. However, Cenvat Credit was allowed to job workers by relying on this contention in the case of Ballarpur Industries v/s CCE [2002 (48) RLT 221], Indian Smelting & Refining Co. Ltd. & ANR. v/s CCE, Mumbai [2003 (57) RLT 948], CCE, Chennai v/s M/s UCAL Machine Tools Ltd.-CESTAT, Chennai [2006 (74) RLT 511 (T.)]. The larger bench of Tribunal also supported this contention of the job workers in the case of Sterlite Industries (I) Ltd v/s Commissioner of Central Excise, Pune [2005 (183) ELT 353 (LB)]”. Matter seemed to have resolved for some time. But very soon, it was reported in case of JSW steel limited v. CCE, Thane [2008-TIOL-917-CSESTAT] that the department has filed an appeal against the aforesaid larger bench decision of Sterlite Components Limited in the High Court but the stay is not granted. This clearly reveals that it is not the final position and the litigation is on.
Reversal of Cenvat credit taken on common inputs
As a last resort, job workers used to reverse the Cenvat Credit attributable to the inputs used in manufacture of goods cleared on job work. This is the situation when there was no provision of reversal in the rule 6(3), i.e. prior to 1.4.08. This pleading proved very effective and is approved by the Apex Court in case of Bombay Dyeing & Mfg. Co. Ltd. reported at 2007 (215) ELT 3 (SC). In this case, hon’ble Apex Court has held that reversal of Cenvat Credit before utilizing the same; amounts to non taking of Cenvat Credit. When no Cenvat Credit is being taken on the common inputs, provisions of rule 6 does not come into play. Issued seemed to be settled in favour of the assessee job workers who opted for proportionate reversal. But very soon, the Tribunal has referred the matter to larger bench in the case of Nicholas Piramal Industries Ltd. Vs. CCE Thane I [2008 TIOL 614 (CESTAT) Mumbai] by saying that the decision was relating to erstwhile Rule 57CC of Central Excise but under new Cenvat Credit Rules, 2004, the Rule 6 does not allow the proportionate reversal of Cenvat credit.
All defenses in present scenario:-
The reversal need not to be done if common input is Fuel. But the same situation has been reversed by the Apex court. Moreover, the Rule has been changed and words “except fuel” have been deleted from the Rule 6. As such, this ground does not hold good. At present, the first defense that rule 6 is not attracted as there is no sale is obsolete now. The second defense that ultimately someone is paying duty also does not hold good because the Larger bench decision of Sterlite Components which was in favour of assessees has been appealed against in the High Court. The third guard of proportionate reversal, i.e. the decision of Bombay Dyeing which has been referred to larger bench may once again come into play due to amendment in Rule 6 ibid from 01.04.2008. This rule allows the proportionate reversal but the calculations given in Rule 6(3A) are so cumbersome that many experts and authors have suggested that one more Ramanujan is needed to do the calculations prescribed in this rule. Furthermore, the reversal takes into account all the inputs whether common or otherwise to do the calculation. This lead to a situation that huge amount is to be reversed as against a small amount of common inputs.
Twist in the play:-
Recently, the Mumbai Tribunal in the case of M/s Tata Motors Ltd v/s Commissioner of Central Excise, Pune-I [2009-TIOL-1427-CESTAT-MUM] held that no credit can be allowed to the jobworker (appellant herein) for processing of goods received under Rule 4 (5) (a). It is further held that the principles laid down by the Apex Court in Escorts Ltd case have not been applied correctly in Sterlite Industries (I) Ltd case.
It was observed that the case of M/s Sterlite Industries (I) Ltd had not taken into account the laws laid down in this regard by the Hon’ble Apex Court in UOI v/s Dharmendra Textile Processors [2008-TIOL-192-SC-CX-LB] and the High Court in CCEx v/s Spectra Electronics Pvt Ltd [2008- TIOL-697-HC-HP-CX]. The Tribunal held that “we do not intend to go beyond the plain reading of the Rules. The Legislature, in its wisdom, has nowhere provided under the Rules that a job worker is entitled to the Cenvat Credit on the inputs used in the manufacture of goods, which are cleared under job work challans used Rule 4(5) (a) of Cenvat Credit Rules without payment of duty to the principal manufacturer. ….. Compliance with the Rules is mandatory even if it is mechanical and involves additional paper work) and non-compliance will result into denial of the Cenvat Credit.”
This decision, though pertain to disposal of stay application, has ignited the fire once again and has buried all the resorts available to the job workers.
Going beyond plain reading:-
See the framings of law and their outcomes – A job worker takes Cenvat Credit on common inputs (like consumables, etc.) of Rs. 38000/- during a particular year. Goods cleared on job work valued at Rs. 50,000,000. Goods cleared on payment of duty – Rs. 150,000,000. Under the provisions of rule 6(2) credit on common inputs (i.e. credit of Rs. 38000/-) will be allowed only if separate records are maintained. However, it is almost impossible to keep separate records of these common inputs. As such, sub rule 3 of rule 6 is attracted according to which either the job worker has to do proportionate reversal as per procedure prescribed in rule 6(3A) which is again very difficult as searching one more Ramanujan is not a tea of everyone’s cup. As such, there is only one alternate available, i.e., to pay an amount @ 10% of value of exempted goods, i.e. Rs. 50,00,000 in the instant case. In other words, for a credit of Rs. 38,000/- one will have to pay Rs. 50 lacs. How strange it is… It is clearly laid down by hon’ble Supreme court in the case of I.T.C. Ltd. vs Commissioner of Central Excise, New Delhi [2004 (171) ELT 0433 (S.C.)] that any interpretation which leads to absurd result which is not the intention of the law makers should not be taken. However, this aspect has not yet been touched in the issue.
Before we part:-
It is clear that the plain reading of provisions of rule 6 of the Cenvat Credit Rules, 2004 gives absurd results. It is not obviously the intention of the law makers. But it is the nature of law that litigation will always be there irrespective of how perfectly any provision is being framed. Same thing is happening with Cenvat Credit Rules, 2004 when read with provisions made for job workers. The non applicability of mind while applying the provisions of rule 6 will continue to harass the innocent job workers till any fruitful remedy either in form of amendment or in form of a stable judicial ruling comes in their favour. Further, if the interpretation of this reversal is continued and it is applied in case of captive exemption notification 67/95-C.E. What will be situation? The manufacturer has to reverse the Cenvat Credit @ 10% after each process. The Cenvat credit of such reversal will not be available to him. It will lead to closure of units. As such mechanical interpretation of rules should be avoided.
Lastly, this litigation has brought the smile on the faces of indirect tax consultants as they have got good job. The huge amount is involved in the litigation. Sometime the amount demanded is more than the job charges received by the manufacturer. Thus, the fee bill is also very high. Let the job work litigation remain forever.
The article by: CA. Pradeep Jain, CA. Preeti Parihar and Sukhvinder Kaur (LLB)