Whether Job-worker entitled to take credit on capital goods used in the manufacture of exempted intermediary products?

Case:-COMMISSIONER OF CENTRAL EXCISE, NOIDA Vs M/s SAMSUNG INDIA ELECTRONIC LTD AND OTHERS

Citation:-2014-TIOL-1708-HC-ALL-CX

Brief facts:-M/s Samsung Electronics India Information and Telecommunication Ltd. (hereinafter referred to as SEIITL) was a public limited company and was engaged in the manufacture of colour monitors and CTV chassis on job works. On 28.12.2002 a team of Central Excise Officers visited the premises of SEIITL and conducted a check and found that SEIITL was manufacturing CTV chassis for Samsung Electronics India Ltd. (hereinafter referred to as SEIL) on job work basis. For this purpose SEIITL had obtained 10 numbers of Auto Insertion Machines from SEIL valued at Rs. 2,75,483.00 involving duty amounting to Rs. 44,12,877.00. SEIITL had taken credit of 50% duty on these machines amounting to Rs. 22,06,438.00 vide entry no.52 dated 18.10.2001 and balance 50% amounting to Rs. 22,06,438.00 was taken vide entry no. 68 dated 01.05.2002. The statement of Manager Production of SEIITL was also recorded, who deposed that all the 10 numbers of Auto Insertion Machine received from SEIL were being used exclusively for the manufacture of CTV chassis for SEIL. On this basis, the checking team consequently found that SEIITL had taken Cenvat Credit amounting to Rs. 74,40,730.00 in respect of Auto Insertion Machine which was used exclusively for job work for the manufacture of CTV chassis. SEIITL was amalgamated with SEIL with effect from 01.04.2003 as per the order of the Delhi High Court dated 07.05.2003. According to the department, since Cenvat Credit had wrongly been utilised by SEIITL and there was suppression of facts and declaration with regard to duty, a notice dated 26.03.2004 was issued to SEIL for contravention of Cenvat Credit Rules, 2001 (hereinafter referred to as the Rules). SEIL submitted its reply and thereafter the Commissioner Central Excise, Noida passed an order in original dated 28.12.2004 disallowing the Cenvat Credit amounting to Rs. 74,40,730.00 and also imposed penalty. Being aggrieved, SEIL preferred an appeal before the Customs, Excise and Service Tax Appellate Tribunal, New Delhi, who by an order dated 21.02.2006 allowed the appeal holding that the SEIL was eligible for availment of Cenvat Credit. The department, being aggrieved, has filed the present appeal under Section 35-G of the Central Excise Act, 1944, which was admitted on the following substantial questions of law:

“1. Whether the CENVAT credit of capital goods taken by the respondents, which are exclusively used in the manufacture of exempted goods, is admissible?

2. Whether the penalties should not be imposed on SEIL as well as on Shri Puspak Verma, Manager (Accounts) and Shri Rahul Sood, Manager (Production) for contravening the provisions of Rule 57E (3), (4) and (5) of the Central Excise Rules, 1944 and Rule 7(1) of Cenvat Credit Rules, 2002?”

Appellant’s contention:-The learned counsel for the appellant contended that SEIITL was not entitled to avail Cenvat Credit on capital goods, which were used exclusively in the manufacture of goods in view of Rule 6(4) of the Rules. The learned counsel contended that Cenvat Credit cannot be utilised by SEIITL in respect of Auto Insertion Machine, which was exclusively used for job work purpose. The learned counsel contended that since the goods manufactured by SEIITL were exempted goods no Cenvat could be taken by the SEIITL.

Respondent’s contention:-On the other hand, Sri M.P Devnath, the learned counsel for the respondents submitted that Rule 6(4) of the Rules has no application and is not available to the respondent inasmuch as SEIITL was only manufacturing an intermediary product whereas Rule 6(4) was applicable to capital goods.

Reasoning of judgment:-The Hon’ble court find that the Excise Department has objected to the availment of Cenvat Credit of Rs. 74,40,730.00 on capital goods that was received by SEIITL from SEIL by applying Rule 6(4) of the Rules and contending that the capital goods have been used exclusively in the manufacture of exempted final products.

Rule 2(b) of the Rules defines capital goods to mean goods which are used in the factory of the manufacturer of the final product. Rule 3 provides that a manufacturer or producer of final products shall be allowed to take credit paid on any inputs or capital goods received in the factory used in the manufacture of intermediary product by a job worker. Rule 6 of the Rules provides that Cenvat Credit shall not be allowed on such inputs which are used in the manufacture of such goods. Sub-rule (4) of Rule 6 of the Rules provides as under:

“(4) No CENVAT credit shall be allowed on capital goods which are used exclusively in the manufacture of exempted goods, other than the final products which are exempt from the whole of the duty of excise leviable thereon under any notification where exemption is granted based upon the value of quantity of clearances made in a financial year.”

From a perusal of Rule 3 of the Rules, it is clear that a manufacturer or producer of final product shall be allowed to take credit on any inputs or capital goods received in the factory including the said duties paid on any inputs used in the manufacture of intermediate products by a job worker and sub-clause (4) of Rule 6 of the Rules provides that Cenvat credit shall not be allowed on capital goods, which are used exclusively in the manufacture of exempted goods. Certain doubts were created as to whether Cenvat credit could be made available on capital goods, which were used in the manufacture of intermediary products. The Central Board of Excise & Customs, New Delhi issued a circular no. 665/56/2002-CX, dated 25.9.2002. For facility, the said circular is extracted hereunder:-

"Circular No. 665/56/2002-CX., dated 25-9-2002
F.No.267/47/2002-CX.8
Government of India Ministry of Finance
(Department of Revenue)
Central Board of Excise & Customs, New Delhi

Subject: Cenvat credit on Capital goods used in intermediate products exempt from duty under the new set of rules

I am directed to refer to the subject cited above and to say that in the absence of a corresponding provision to rule 57R(2) of Central Excise Rules, 1944 in new rules effective from 1-7-2001, a doubt has arisen whether Cenvat credit shall be available on the capital goods used in manufacturing of intermediate goods exempt from payment of duty e.g. capital goods used in the preparatory stages of cotton in a textile mill which are exempt from duty but are produced in the course of manufacturing of finished products chargeable to duty.

2. The matter has been examined by the Board. It is observed that although there is no provision in the existing Cenvat Credit Rules, 2002 corresponding to erstwhile rule 57R (2), the new rules have no provisions barring the credit on capital goods used in the manufacture of exempt intermediate product. Simultaneously, the use of these capital goods in the overall manufacturing process of finished dutiable goods is not in dispute.

3. It is, therefore, clarified that Cenvat credit should not be denied on the capital goods used in manufacturing of intermediate goods exempt from payment of duty which are used captively in the manufacture of finished goods chargeable to duty.

4. Trade & field formations may please be informed suitably.

5. Receipt of the same may be acknowledged.

6. Hindi version will follow.”

The circular indicates that Cenvat credit cannot be denied on capital goods used in the manufacture of exempt intermediate products exempt from payment of duty, which are used captively in the manufacture of finished goods chargeable to duty.

In Commissioner of C.Ex., Ludhiana Vs. Jainsons Wool Coombers Ltd., 2012 (26) S.T.R. 488(P & H) = 2011-TIOL-121-HC-P&H-CX, the Court held that Cenvat credit is permissible to a job worker or even to a manufacturer at intermediate stage in respect of inputs like lubricants, soaps, chemical etc. where on final products, duty is admittedly paid. The Court held that the object of Cenvat credit is to avoid cascading effect of duty. In Commissioner of C.Ex., Bangalore Vs. Bharath Fritz Werner Ltd., 2007 (218) E.L.T. 177 (Kar.), the Court held that the assessee was entitled to Cenvat credit by using the captively consumed machines, which are used for manufacture of goods on job work basis and in respect of such final products wherein the principal manufacturer makes payment of duty but the job worker, namely, the assessee who undertakes the job work takes credit using the captively consumed machines for doing such job work.

In Escorts Ltd. Vs. Commissioner of Central Excise, Delhi, 2004 (171) E.L.T. 145 (S.C.) = 2004-TIOL-72-SC-CX, the appellants were manufacturer of tractors. They availed Modvat credit inrespect of duties paid on inputs used in the manufacture of parts. Those parts were thencleared to another factory of the appellant, without payment of duty. The parts were thenused to manufacture tractors on which duty was paid. According to the appellant Modvat creditwas available to them since the duty was being paid on the tractors. The Supreme Court heldthat merely because parts were cleared from one factory of the appellants to another factorydid not make these parts a final product. The Supreme Court further found that the parts,which are manufactured from the duty paid inputs, were used in the manufacture of tractorsand that the duty was paid on the tractors. The Supreme Court held that in order to preventthe cascading effect if duty is levied both on the inputs and finished goods, credit wasavailable to the appellants so long as duty was paid on the final product.

The Supreme Court in Escorts' case (Supra) further held that Rule 57C of the Central Excise Rules, 1944 was not applicable. For facility, Rule 57C of the Central Excise Rules, 1944 is extracted hereunder:

"57C Credit of duty not be allowed if final products are exempt.- No credit of the specified duty paid on the inputs used in the manufacturer of a final product (other than those cleared either to a unit in a Free Trade Zone or to a hundred percent Export-Oriented Unit) shall be allowed if the final product is exempt from the whole of the duty of excise leviable thereon or is chargeable to nil rate of duty."

From a perusal of the aforesaid Rule 57C it is clear that it is pari materia to Rule 6(4) of the Cenvat Credit Rules 2001.

They find that SEIITL only manufactured the chassis, which is only a part of a TV. It is not a finished product and is only an intermediary product. They also find that SEIITL supplied intermediary product to SEIL, which manufactured the TV and paid duty on it. Consequently, it was entitled to avail Cenvat Credit in order to prevent the cascading effect, if duty was levied. They are of the opinion that SEIITL, which was the job worker was entitled to duty paid on inputs and used in the manufacture of intermediary product. Consequently, for the reasons stated aforesaid, the appeal fails and is dismissed. The questions of law are answered in favour of the assessee and against the department.

Decision:-Appeal dismissed.

Comment:- The analogy of the case is that Cenvat credit cannot be denied to the job-worker on the capital goods used in the manufacture of exempt intermediate products exempt from payment of duty, which are used captively in the manufacture of finished goods chargeable to duty. The reason for the same being that ultimately duty is being paid on the final product that is manufactured.

Prepared by:- Monika Tak

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