JOB WORK AND REVERSAL: ALL IS WELL……..

SUBMITTED BY: -
CA PRADEEP JAIN
JITESH BHANDARI
MAYANK PALGAUTA

Visit us at www.capradeepjain.com

INTRODUCTION:

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

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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

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 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: -

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  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

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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.

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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.”

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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.

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