Captive Consumption and Job Work under Central Excise Act

A Project on
‘CAPTIVE CONSUMPTION AND JOB WORK UNDER
CENTRAL EXCISE ACT’

SUBMITTED TO: MR. RANA NAVNEET ROY

ASSISTANT PROFESSOR,
FACULTY, INDIRECT TAXES

SUBMITTED BY: - SHUBHANKAR THAKUR

ROLL NO.-149
SEMESTER VIII
Date of Submission: - April 6th, 2017

HIDAYATULLAH NATIONAL LAW UNIVERSITY

RAIPUR, (C.G)

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 Captive Consumption and Job Work under Central Excise Act

TABLE OF CONTENTS

SL No. TOPIC PAGE No.

1. LIST OF ABBREVIATIONS iii

2. TABLE OF CASES iv

3. ACKNOWLEDGEMENT v

4. RESEARCH METHODOLOGY vi

5. 1
INTRODUCTION

6. 2
CONCEPT OF CAPTIVE CONSUMPTION
 Captive Consumption under CENVAT
7. 3
CONCEPT OF JOB WORK
 Definition
 Job Work and Manufacturing
 Job Work- Levy of Central Excise or
Service Tax
 Job Work under CENVAT

8. 8
JOB WORK IN CAPTIVE CONSUMPTION
9. CONCLUSION 10
10. BIBLIOGRAPHY vii

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 Captive Consumption and Job Work under Central Excise Act

LIST OF ABBREVIATIONS

CCE Commissioner of Central Excise

CE Central Excise
CESTAT Custom Excise & Service Tax
Appellate Tribunal
CETA Central Excise Tariff Act
ELT Excise Law Times
ICWAI Institute of Cost and Work
Accountants of India
SC Supreme Court
ST Service Tax
u/n under notification

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 Captive Consumption and Job Work under Central Excise Act

TABLE OF CASES
 Ashok Iron Works Limited v. CCE, 2004 (168) ELT 198
 Elcon Clipsal India Limited v. CCE, 2002 (146) ELT 360
 Prestige Engineering India Ltd v CCE Meerut, 1994 (73) ELT 497 (SC)
 Tambraparani Containers v. CCE, 2005 (187) ELT 276 (CESTAT)
 Thermax Surface Coating Limited v. CCE, 2002 (145) ELT 356
 Triveni Engineering Industries Limited v. CCE, 2001 (136) ELT 617

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 Captive Consumption and Job Work under Central Excise Act

ACKNOWLEDGEMENT

This project is a result of sheer hard work and dedication. I would like to pay my heartfelt
gratitude to my respected faculty Mr. Rana Navneet Roy Sir for providing such a
challenging topic. If he had not shown faith in me, I don’t think this project would have
been reality. He guided me at every footstep and providing me wholesome help,
wherever I required.
I would also like to say thanks to entire HNLU administration for allowing me to use
whatever the facilities available throughout the campus.
Lastly, from the very outset, I was encouraged by my friends and classmates in the right
direction, so that I can focus on the task.
Some printing errors might have crept in, which are deeply regretted. I would be grateful
to receive comments and suggestions to further improve this project report.

Shubhankar Thakur,
Roll No. 149,
Sem VIII

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 Captive Consumption and Job Work under Central Excise Act

RESEARCH METHODOLOGY

1. Preliminary analysis:
a. Identification of various sources.

2. Consulting secondary sources

a. Study of various materials available in books, journals as well as over

internet.

3. Conduct of Research

4. Evaluation of research

5. Analysis

6. Conclusion on the basis of research

The research methodology will be doctrinal in nature as the objectives will be sought to
be fulfilled and the conclusions derived at by analyzing the views of various
experts/authors.

The research tools to be adopted for the descriptive part of this particular project-work
will be basically the secondary sources viz. Books, Journals and Internet. Some primary
sources viz. text of notifications, circulars and rules has also been used at certain places.

FOOT NOTE AND CITATION STYLE:

1. Where the source prescribes a particular footnoting style, the same has been
followed, together with the footnoting style prescribed by the Hidayatullah
National Law University, Raipur.
2. In all other cases uniform footnoting style has been followed.

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 Captive Consumption and Job Work under Central Excise Act

INTRODUCTION

Excise duty is collected on goods manufactured or produced in India. The taxable event
for levy of excise is the ‘manufacture or production’ in India. This means that the duty is
payable as soon as goods are manufactured within the factory. In manufacturing of a
good, various stages are involved. It may happen that at some stages of
manufacturing/production different products are formed. These products formed at
different stages of production of final product are called intermediate products. Since the
taxable event is manufacturing, these intermediate goods are also liable to excise duty.1

The concept of captive consumption deals with consumption of intermediate goods

within the factory of production. The concept of job work deals with sub-contracting of a
particular process to a job worker. This process may or may not amount to
manufacturing.

This project deals with the concept of captive consumption and job work in the light of
liability to pay excise duty. The correlation between the two concepts has also been
sought to be established.

1
provided it fulfills the condition of marketability.

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 Captive Consumption and Job Work under Central Excise Act

CONCEPT OF CAPTIVE CONSUMPTION

Captive Consumption means the consumption of goods manufactured by one division
and consumed by another division(s) of the same organization or related undertaking for
manufacturing another product(s).2

Liability of excise duty arises as soon as the goods covered under excise duty are
manufactured but excise duty is collected at the time of removal or clearance from the
place of manufacture even if such removal does not amount to sale. The duty is
determined on the date of removal of goods from place of manufacture. In case where the
exciseable goods are used within the factory, the date on which the goods are issued for
use in factoryis considered as the date of removal of such goods (Explanation to Rule 5). 3
Thus duty will be determined on the date when these goods are put to captive
consumption.

Paying duty on all captive consumption is highly inconvenient to manufacturers and

hence exemptions have been given in many cases. There are various notifications
exempting duty on captive consumption; however we shall deal with only an important
notification exemption notification to understand the concept and to establish its
relationship with job work.

Notification No. 67/1995 CE dated 16.3.1995 exempts:

(a) capital goods as defined in CENVAT Credit Rules, 2002 manufactured in a factory
and used within factory of production;

2
Cost Accounting Standard on Cost of Production for Captive Consumption, published by ICWAI.
Available on http://www.icwai.org/icwai/docs/CASB/icwaicas4.pdf.
3
See Rule 4 & 5 of the Central Excise Rules.

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 Captive Consumption and Job Work under Central Excise Act

(b) all goods falling under First Schedule 4 to Central Excise Tariff Act (CETA)
manufactured in a factory and used within the factory of production in or in relation to
manufacture of final products specified in First Schedule to CETA5.
from all the duties of excise leviable thereon.

Thus from the above, to qualify for the above said exemption notification, thefollowing
conditions need to be satisfied:
Capital Goods6:
1. They must satisfy the definition under CENVAT Credit Rules
2. They must be manufactured within the factory.
3. They must be used within the factory of production.

All other Goods:

1. They must be falling under First Schedule to CETA.
2. They must be manufactured within the factory.
3. They must be used within the factory of production in or in relation tothe manufacture
of final products specified in First Schedule to CETA.

Thus an essential pre-condition for availing exemption under this notification is that the
goods should be manufactured in a factory and used within factory of production i.e they
should be captively consumed. Another essential condition is that the final products
should be neither exempted from the payment of Exciseduties nor chargeable to nil rate
of duty save some specifiedclearances.7 Where the final products are exempted from duty
of excise, the intermediate goods will be liable to duties of excise.

Captive Consumption under CENVAT- The concept of captive consumption finds

reference only in the definition of capital goods and definition of inputs. These
definitions provide a necessary condition that the items mentioned therein have to be

4
other than light diesel oil, high speed diesel oil and motor spirit, commonly known as petrol.
5
except matches and few other products mentioned in column 2 of the table in the notification.
6
Capital goods have been defined under Rule 2(a) of Cenvat Credit Rules. The rule lays down a list of
goods which will be called capital goods. e.g.- tools, hand tools, knives etc.
7
Datey V.S, Indirect Taxes, Nineteenth edn 2007, Taxmann Publications (P) Ltd., p. 291.

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 Captive Consumption and Job Work under Central Excise Act

used in the factory of production i.e. captively consumed, to be termed as capital

good/input under CENVAT Credit Rules.

CONCEPT OF JOB WORK

It is not possible for manufacturers to carry out all processes in their own premises. The
processes which pose problems or which are not cost effective at his end can be sub-
contracted or delegated to another manufacturer or processor. Many a time, the sub-
contractor may be more efficient both in terms of the quality and cost as compared to the
main manufacturer due to pursuance of core competencies. Most of the big manufacturers
make very good use of this concept and assign processes to more than one vendor which
enables them to cut down on manufacturing costs.8 This sub-contractor is referred to as
‘job worker’ and the concept is called ‘job work’ or ‘sub contracting’.

Illustration- A car manufacturer sub-contracts with a small scale unit which specializes in
painting, to paint the cars manufactured by it. The car manufacturer (customer) provides
unpainted cars to sub-contractor (job worker) who returns the car back to the customer
after painting. The car manufacturer here is getting the work done on job work basis
through the job worker.

Definition- In the context of the Central Excise law, job work has been defined under
Rule 2(n) ofthe Cenvat Credit Rules, 2004 to mean processing or working upon of raw
material orsemi-finished goods supplied to the job worker, so as to complete a part or
whole of theprocess resulting in the manufacture or finishing of an article or any
operation which isessential for aforesaid process.

The work sub-contracted to job worker can be done within the factory premises or even
outside the factory. Where the job work has to be done outside the factory, as per Rule

8
ibid

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 Captive Consumption and Job Work under Central Excise Act

16A, the raw material or partially processed goods can be removed after fulfilling
conditions specified by the Commissioner of Central Excise.

It is vital to note here that the process undertaken by the job worker on thegoods that are
supplied to him for job work may or may not amount to manufacture.If one were to go by
the definition of the term “job work”, it is evident the raw materialshave to be supplied
by another person.9 In Prestige Engineering India Ltd v CCE Meerut10 the Supreme Court
held that when the job worker contributed hisown material to the goods supplied by the
customer and engaged in manufacturing, theactivity was not one of job work. However,
minor additions by the job worker would nottake away the fact that the activity was one
of job work.

Job Work and Manufacturing- Since excise duty is on ‘manufacture’, duty liability
arises only when the goods aremanufactured during job work. Where the goods are
manufactured during job work, the job worker would be liable to pay excise duty on the
goods so manufactured unless the principal manufacturer who has supplied him the goods
for job work, furnishes a declaration under Notification 214/86 dated 25.03.1986 which
exempts goods manufactured by a job worker from excise duty provided the said goods
after job work are returned to the principal or cleared for export or cleared for home
consumption on payment of duty of excise.11 Where the goods are returned to the
principal, the principal should either clear it on payment of duty or use it in his
manufacturing process which should result in a dutiable product being manufactured. The
declaration as stated above should be given to the Assistant Commissioner of Central
Excise who has jurisdiction over the factory of the job worker.

Where this notification does not apply, Rule 16B applies. 12 Under the rule, excisable
goods in the nature of semi finished goods can be removed for carrying out certain
manufacturing processes with the permission of Commissioner of Central Excise. The

9
Madhukar Hiregange & Srikantha Rao, Job Work under Central Excise. Available on
http://www.hiregange.com/articles/job_work_central_excise.pdf; last visited on January 28, 2011.
10
1994 (73) ELT 497 (SC)
11
Supra at 9
12
Supra at 7

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 Captive Consumption and Job Work under Central Excise Act

Commissioner may allow these goods to be brought to the parent factory, without
payment of excise duty or may allow it to be directly cleared from the place, to which the
goods have been removed, on payment of excise duty.

Job Work- Levy of Central Excise or Service Tax: Where the processing undertaken
by the job worker does not amount to manufacture, the said job worker could be liable to
service tax under the heading ‘Business Auxiliary Service’ as per which, the activity of
production or processing of goods for, or on behalf of the client would be taxable. The
liability in terms of job work can arise where the processing is done for the client.
However, where the processing amounts to manufacture, the same would not be taxable
under service tax and the liability if any would have to be studied under Central Excise.
Even if the processing comes under Business Auxiliary Service, the job worker would be
entitled to exemption from service tax under notification 8/2005 ST where the goods after
processing are returned to the principal for use in or in relation to manufacture of dutiable
goods which are cleared on payment of duty of excise. Where the goods to be cleared by
the principal are exempted goods or goods which are chargeable to nil rate of duty, the
exemption to the job worker u/n 8/2005 ST would not be available and he would be liable
to service tax.13

Job Work under CENVAT- Cenvat credit can be availed on materials sent for job work
as per rule 4(5)(a) of the Cenvat Credit Rules, 2004. Rule 4 (5) (b) requires that the
goods sent to the job worker have to be brought back by the manufacturer within 180
days of being sent to the job worker.14 It has to be established from the records, challans
or memos or any other document produced by the manufacturer taking the Cenvat credit
that the goods have been received back in the factory within one hundred and eighty days
of goods being sent to the job worker.

13
Supra at 9
14
If the inputs or the capital goods are not received back within one hundred and eighty days, the
manufacturer shall pay an amount equivalent to the Cenvat credit attributable to the inputs or capital goods
by debiting the Cenvat credit account with the amount so attributable to the inputs or capital goods not
received. But the manufacturer can take once again the Cenvat credit so debited when the inputs or capital
goods are received back in his factory.

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 Captive Consumption and Job Work under Central Excise Act

The Cenvat credit shall also be allowed in respect of jigs, fixtures, moulds and dies
sentby a manufacturer of final products to a job worker for the production of goods on
hisbehalf and according to his specifications. The restriction with regard to the
requirementof receiving the goods back within 180 days from the date of sending would
not apply tosuch tools, dies, fixtures and moulds.

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 Captive Consumption and Job Work under Central Excise Act

JOB WORK IN CAPTIVE CONSUMPTION

In big factories, the goods are given as subcontract to various job workers. Such job
workers fabricate and supply these goods within the factory itself. In such cases, whether
the benefit of the exemption under Notification 67/95 can be denied on the ground that
the subject goods have been manufactured by some other person and not by the assessee
himself.

In this connection, it is pertinent to note that, there is no requirement whatsoever in the

said notification as to who shall manufacture such goods. A careful reading of the above
said notification reveals that, what is intended in the notification is that the subject goods
shall be manufactured in the factory of production for the manufacture of final products.
In other words, the facts like, who has manufactured such goods or on whose behalf, etc
are not at all relevant to claim the benefit of the said exemption. 15 As such, the above said
exemption shall be available for the goods manufactured by job worker too, if they are
manufactured within the factory premises and used within the same premises in or in
relation to the manufacture on final products which are chargeable to duty of Excise.

InThermax Surface Coating Limited v. CCE16it has been held that the paint shop
constructed by the appellant at the site of another company, are entitled to the benefit of
Notification 67/95.The decision of the Hon’ble Tribunal in the case of Triveni
Engineering Industries Limited v. CCE17, has been relied upon in this regard, wherein, the
Hon’ble Tribunal has held that there is no requirement under the said Notification that the
goods must be used by the same manufacturer in his factory of production. Similar view
has been held in Tambraparani Containers v. CCE18.
15
S. Jaikumar et al, Captivating ‘Captive Consumption’. Available on
http://www.swamyassociates.com/downloads/2005/CAPTIVATING-CAPTIVE-CONSUMPTION.pdf; last
visited on October 16, 2009.
16
2002 (145) ELT 356
17
2001 (136) ELT 617
18
2005 (187) ELT 276 (CESTAT)

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 Captive Consumption and Job Work under Central Excise Act

The decision of the Hon’ble Tribunal in the case of Elcon Clipsal India Limited v.
CCE19is also relevant. In this case, the benefit of exemption under Notification 67/95 has
been extended for the goods manufactured and utilized by the appellant in his factory of
production, notwithstanding the fact that the appellant had billed his customer for such
goods. While coming to the decision, the Hon’ble Tribunal has laid emphasis only on the
fact of utilization of the subject goods, in the factory of production. Similar view was
held in the case of Ashok Iron Works Limited v. CCE20also.

19
2002 (146) ELT 360
20
2004 (168) ELT 198

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 Captive Consumption and Job Work under Central Excise Act

CONCLUSION

From the forgoing chapters, it can be concluded that the benefit of notification 67/95 is
available for all the goods specified in Column (1) of the table to the said notification,
provided if they are manufactured within the factory and used within the factory for the
manufacture of final products on which appropriate duty of excise is paid, irrespective of
the fact, such goods are manufactured by the assesse themselves or by job workers. Thus
job work can be done even where the goods are consumed captively without losing out
on the exemption given under the said notification.

However it would be very difficult to relate the two concepts specifically under
CENVAT Rules as captive consumption appears merely in definition of inputs and
capital goods. The rule referring to the job work only requires the goods to be brought
back by the manufacturer. It nowhere states that the goods brought back have to be used
within the factory of production. Hence drawing any corollary with regard to these
concepts under CENVAT Rules is not possible.

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 Captive Consumption and Job Work under Central Excise Act

BIBLIOGRAPHY
ARTICLES
 Cost Accounting Standard on Cost of Production for Captive Consumption,
published by ICWAI
 MadhukarHiregange&SrikanthaRao, Job Work under Central Excise
 S. Jaikumaret al, Captivating ‘Captive Consumption’

BOOKS
 Datey V.S, Indirect Taxes, Nineteenth edn 2007, Taxmann Publications (P) Ltd.

DICTIONARIES:-
 Concise Oxford Dictionary, ed., Judy Pearsall, 10th ed. Oxford University Press,
2002 Garner Bryan, Black’s Law Dictionary, 7th ed. West Group Publications,
1999

URLs
 http://www.swamyassociates.com/downloads/2005/CAPTIVATING-CAPTIVE-
CONSUMPTION.pdf
 http://www.hiregange.com/articles/job_work_central_excise.pdf
 http://www.icwai.org/icwai/docs/CASB/icwaicas4.pdf

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