Cenvat Credit on Exempted Job Work

By: RAJESH KUMAR & ASSOCIATES  25/01/2009
Keywords: Central Excise Consultant, Excise & Service Tax, Service Tax- Advocate & Consultant,

Thequerist unit is engaged in processing material, supplied by principal manufacturers on job work basis. Such job work is covered under Business auxiliary service attracting service tax. However, Notification 8/2005-S.T. dated 01.03.2005 exempt such job work on the condition that the material is returned to the principal manufacturer for further manufacture, on which finally duty is payable. A part of the job work (10% approximately) of the querist is not covered under this notification, on which he is paying service tax. Rest of the job work is covered under this notification, on which he is not paying service tax on output service.  for legal opinion;
A.                Whether the querist is eligible for cenvat credit on inputs and input services used in providing such exempted job work.
B.                What is the procedure he should follow, in fact and circumstances of the case, when almost 90% of the job work is done is covered under the conditional exemption notification, 8/2005-ST dated 01.03.2005.
C.                Is it mandatory to follow the Notification 8/2005-ST dated 01.03.2005 or the querist can pay service tax and avail cenvat credit on inputs, capital goods and input services.   
Job work is a widely followed practice. In this practice a principal manufacturer sends raw materials to job worker for various processing. In this processing, the job worker uses some consumables, minor materials, capital goods and input services. This process involved in job work may amounts to manufacture, in which case Central Excise duty is payable, or may not amount to manufacture, in which case service tax is payable under the head business auxiliary service. When processed goods after job work is returned to the principal manufacturer, which is further used by the principal manufacturer in further production on which ultimately Central Excise duty is paid; such job work is exempted from payment of Central Excise duty vide Notification 214/86 or under Cenvat Credit Rules & Service Tax is exempted under Notification 8/2005.
The first issue which is to be decided as to whether the person providing this exempted job work can Cenvat Credit or Not? The job-worker is carrying job-work in terms of Central Excise & Service Tax law and procedures. Central Excise or service tax law and procedure does not prohibit a job worker from utilizing other inputs or input services in addition to raw material received by him from the principal manufacturer. There is no bar under in Central Excise from using own material in addition to material supplied by the principle manufacturer as this view is also held in Shakti Insulated Wires Ltd  Vs. CCE [1999 (114) ELT 424] further, it is submitted that a jobworker, after using his own inputs used in the job-work of the goods/raw materials can clear the said goods/raw materials to the principle manufacturer without payment of duty after availing the Cenvat credit on the inputs used by him, provided, the duty ultimately gets paid by the principle manufacturer. In other words, a job-worker can avail Cenvat credit on the inputs/input services used by him in undertaking job-work and after availing Cenvat credit on such inputs/input services can clear the goods to the principle manufacturer without payment of duty only when, the duty is finally paid by the principle manufacturer. In this case, the duty does not get paid at the job-worker’s end at the time of clearence of the goods, but ultimately gets paid at the manufacturer’s end. In the instant case the final product after the job-work is liable to excise duty and not exempted from duty.
Similar issue arose before Tribunal in case of Jindal Polymers Vs. CCE, Meerut-III [2001 (135) ELT 657] where it was held that the job-worker is entitled to cenvat credit on inputs used in the manufacture or processing of polymer/polyester chips on job-work, cleared without payment of duty to the parent manufacturer for manufacture of polyester/polymer filament yarn under notification no. 214/86 as polyester/polymer filament yarn being chargeable to excise duty.
The issue was examined by the Larger Bench of the Tribunal in Sterlite Industries (I) Ltd. Vs. CCE, Pune [2005 (183) ELT 353] the larger bench of the Hon’ble Tribunal held that,
“In only case of Escorts Ltd. v. CC Ex, Delhi [2003 (160) E.L.T. 623 (Tri-Del.)] while interpreting Rule 57C of the Central Excise Rules, the Tribunal rejected the appellants claim of Modvat credit of duty paid on the inputs used in the manufacture of the parts, which were cleared without payment of duty to, appellant's other unit under Chapter X procedure and utilised in the manufacture of tractor which were cleared on payment of duty by observing that since no duty was paid on the part at the time of clearance, Rule 57C will apply and no Modvat credit would be admissible. However, the said decision was subsequently reversed by the Supreme Court as reported in Escort v. C.C.Ex. [2004 (171) E.L.T. 145 (S.C.)]. For appreciation, we reproduce paragraphs 8 & 9 of the said decision.
8.     It is to be seen that the whole purpose of the Notification and the Rules is to streamlines the process of payment of duty and to prevent the cascading effect if duty is levied both on the inputs and the finished goods. Rule 57D(2), which has been extracted hereinabove, shows that in the manufacture of a final product an intermediate product may also come into existence. Thus in cases where intermediate product may also come into existence. Thus in cases where intermediate product comes into existence, even though no duty has been chargeable to Nil rate of duty, credit would still be allowed so long as duty is paid on the final product.
9.     In cases of manufacturers like the Appellants the final product is the tractor. The intermediate product would be parts which are manufactured for being used in the tractor. In such a case the parts would not be the final product. Thus Rule 57C would have no application. The mere fact that the parts are cleared from one factory of the Appellants to another factory of the Appellants would not disentitle the Appellant from claiming benefit of Notification No. 217/86-C.E., dated 2nd April, 1986. As stated above, the Notification itself clarifies that the inputs can be used within the factory of production or in any other factory of the same manufacturer.”
By applying the ratio of the above decision, it becomes clear that Modvat credit of duty paid on the inputs used in the manufacture of final product cleared without payment of duty for further utilisation in the manufacture of final product, which are cleared on payment of duty by the principal manufacturer, would not be hit by provision of Rule 57C. Inasmuch as, the matter stands decided by the Honourable Supreme Court, we would hold in favour of querist.
Similar view has also been taken in Bajaj Tempo Ltd. Vs. CCE, Pune [1994 (69) ELT 122], J.K. Synthetics Ltd. Vs. CCE, Jaipur, [1996 (87) ELT 389. In Shkti Insulated wires Ltd. Vs. Commissioner of Central Excise & Custom Mumbai-V [2002 (149) ELT 668] the Hon’ble tribunal held that,
“2.The appellant  is engaged in the manufacture of paper covered copper strips falling under chapter sub-heading 8544 of the Central Excise Tariff Act. They manufactured the said products on a job work basis and also on their own account. The appellant sometimes received the inputs i.e. copper wires and/or rods from their principal manufacturer which, after processing by the appellant, are returned to their principal manufacturer under the provisions of Rule 57F(3) of the Central Excise Rules. When they clear such types of materials after processing, they do not pay duty as the duty on the final products are paid by the principal manufacturer. As far as the goods i.e. paper covered copper strips manufactured and finally cleared by the appellant on their own account, they pay duty on clearance. Show cause notice was issued charging the appellant that Modvat credit obtained by the appellant was inadmissible on the ground that they have availed inadmissible Modvat credit on insulated craft paper used in the processing of copper wire/rods received under the provisions of Rule 57F(3) which were further processed and cleared as paper covered copper strips without payment of duty under the provisions of Rule 57F(3) as it comes under the provisions of Rule 57C of the Rules. The Assistant Commissioner confirmed the demand. On appeal, the appellate authority confirmed the order-in-original. Hence the present appeals.
3.The learned  advocate for the appellant invited my attention to the judgment of the Tribunal in the case of Jindal Polymers v. CCE - 2001 (135) E.L.T. 657 (T) = 2001 (43) RLT 680 where under similar circumstances the two member bench, after referring to the earlier judgment of the Tribunal, has upheld the claim of the job worker. Learned DR reiterates the impugned orders. I have considered the rival submissions and I am of the view that the said judgment is squarely applicable to the present case. I therefore allow the Appeal E/3264/2000, setting aside the impugned order with consequential relief.
4.As far as the  other Appeal E/3265/2000 is concerned, the inputs which the appellant manufactured have been captively consumed for the manufacture of final products which have been cleared by the appellant themselves and the said final product has also been cleared on job work basis. The circumstances, in my view, is also covered by the judgment of the Tribunal in Jindal Polymers case (supra). Hence this appeal also stands allowed, ordering consequential relief, after setting aside the impugned order. It is to be noted that the case has been affirmed by the Supreme Court as reported in [2003 (151) ELT A89]. The case has also been affirmed by larger bench of the Tribunal Judgment in case of Sretlite Ltd quoted supra. In Bharat Friz Werner Ltd v. CCE [2005 (191) ELT 1009], Hon’ble Tribunal held that, “We have gone through the records of the case carefully. The appellants received certain dutiable inputs and manufactured machines. They utilised these machines for job work. After job work, the goods were sent under 57F(4) Challan to the principal manufacturers. The department is of the view that the machines manufactured by the appellant are exclusively used in the manufacture of the exempted goods. Therefore, the inputs are not entitled for Cenvat credit. In other words, the department is equating goods sent under 57F(4) challan with exempted goods. This is not correct. The goods, which are sent to principal manufacturer, are not exempted goods. Ultimately, they would be cleared on payment of duty. Hence, the reasoning adopted by the department is not correct. Moreover, all the case laws cited by the appellant are very relevant in deciding this issue. In the case of KSH International, the Tribunal rejected the Revenue appeal and held that clearance of goods on job work does not amount to clearance under full exemption or at Nil rate of duty. The ratio of this decision is squarely applicable to the present case. Under these circumstances, we allow the appeal and set aside the impugned order.”
Recently the proposition has been followed in following case:
1.                CCE Banglore v. South India Wire Products [2008 (228) ELT 290]
2.                R M Polypack v. CCE, Allahabad [2008 (226) ELT 591]
3.                CCE Mumbai v. National Standard [2008 (226) ELT 431]
4.                Shri Uma Foundaries v. CCE Kolkata [2008 (222) ELT 317]
In view of these binding judgment and settled position of law, following legal principles emerges:
1.                Goods cleared under job work exemption are not exempted goods, as ultimately duty is paid by the principal manufacturer. 2.                The job worker is permitted to use his own capital goods/inputs/input services in the job work.
3.                When the job worker uses his own capital goods/inputs/input services in job work, he is entitled to take credit of duty on those capital goods/inputs/input services. In view of this I am of the opinion that the a job worker, in abovesaid cisrcumstances is eligible to take Cenvat Credit on inputs and input services used in doing job work, on which ultimately duty burden will be discharged by the principal manufacturer.  
NOTIFICATION 8/2005-ST DATED 01.02.2005- CAN IT BE IMPOSED ON SERVICE PROVIDER:   It is a settled principle that an conditional exemption notification cannot be imposed on an assessee. The view has been upheld by Tribunal in case of Remedies Pharma v. CCE [1998 (101) ELT 344], CCE v. VIP Industry [1998 (103) ELT 95], Steelco Gujrat v. CCE [2000 (122) ELT 381] and numerous other cases. The Notification 8/2005 is a conditional notification, conditions being, “Provided that the said exemption shall apply only in cases where such goods are produced using raw materials or semi-finished goods supplied by the client and goods so produced are returned back to the said client for use in or in relation to manufacture of any other goods falling under the First Schedule to the Central Excise Tariff Act, 1985 (5 of 1986), as amended by the Central Excise Tariff (Amendment) Act, 2004 (5 of 2005), on which appropriate duty of excise is payable.” Further, implicitly the exemption is subject to the condition that no credit of inputs or input services shall be availed in providing exempted output service. As the exemption is conditional, it is the option of the assessee either to avail the exemption or not. In view of this, I am of the opinion that an assessee may refuse to avail the benefit of this notification and opt to pay service tax on output service of job work. SUGGESTION: In view of these, the querist is entitled to take cenvat credit on inputs, capital goods and input services while providing job work. Such credit is available, irrespective of the fact that whether he avails the benefit of exemption notification 8/2005-ST dated 01.03.2005. The other option available to the assessee is not to avail service tax exemption 8/2005-ST dated 01.03.2005 and avail cenvat credit in inputs, capital goods and input services. In this case the querist shall be paying service tax on job work done. Keeping the specific requirement of the querist in mind, availing notification 8/2005 will result in accumulation of credit in books of querist, it is suggested that there is no need to avail this exemption notification and service tax of such job work should be paid.  
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Keywords: Central Excise Consultant, Excise & Service Tax, Service Tax- Advocate & Consultant,

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