Whether goods cleared under job work notification 214/86 be treated as exempted and liable for payment of 5% under Rule 6(3)?

PJ/Case Study/2012-13/43

Prepared by:- CA Neetu Sukhwani & Kavita Thanvi

CASE STUDY

Introduction:

A Show Cause Notice C.No:- V(73)30/34/2012/ 8575 dated 25.06.2012 was issued to M/s. Angel Pipes & Tubes (P) Ltd., wherein the assessee was found to not have paid an amount equal to 5% as of the total value of the goods manufactured on job work under the provision of notification no. 214/86-CE dated 25.3.86 by alleging that they had not maintained separate accounts for receipt, consumption and inventory of inputs used in the manufacture of goods on job work as the same were similar to exempted goods and so amount equal to 5% was payable under Rule 6(3) of the Cenvat Credit Rules, 2004. But, it was contended by the assessee that though they had not maintained separate accounts for receipt, consumption and inventory of inputs used in the manufacture of goods which were cleared by them under Notification No. 214/86-CE but they were not liable to pay any amount in terms of Rule 6(3) of Cenvat Credit Rules as goods cleared after availing exemption under Notification No. 214/86-CE were not actually exempted goods for the purpose of Sub Rule (2) and (3) of Cenvat Credit Rules.

M/s Angel Pipes & Tubes (P) Ltd. [OIO No. 02/2013-CE-DEMAND, dated 24.03.2013]

Relevant Legal Provisions:

Rule 6.Obligation of manufacturer of dutiable and exempted goods and provider of taxable and exempted services.-

(1) The CENVAT credit shall not be allowed on such quantity of input or input service which is used in the manufacture of exempted goods or for provision of exempted services, except in the circumstances mentioned in sub-rule (2).

Provided that the CENVAT credit on inputs shall not be denied to job worker referred to in rule 12AA of the Central Excise Rules, 2002, on the ground that the said inputs are used in the manufacture of goods cleared without payment of duty under the provisions of that rule.

(2) Where a manufacturer or provider of output service avails of CENVAT credit in respect of any inputs or input services, 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.

(3) Notwithstanding anything contained in sub-rules (1) and (2), the manufacturer of goods or the provider of output service, opting not to maintain separate accounts, shall follow either of the following options, as applicable to him, namely:-

(i)	the manufacturer of goods shall pay an amount equal to five per cent. of value of the exempted goods and the provider of output service shall pay an amount equal to six percent. of value of the exempted services; or
(ii)	the manufacturer of goods or the provider of output service shall pay an amount equivalent to the CENVAT credit attributable to inputs and input services used in, or in relation to, the manufacture of exempted goods or for provision of exempted services subject to the conditions and procedure specified in sub-rule (3A).
	Explanation I.- If the manufacturer of goods or the provider of output service, avails any of the option under this sub-rule, he shall exercise such option for all exempted goods manufactured by him or, as the case may be, all exempted services provided by him, and such option shall not be withdrawn during the remaining part of the financial year.
	Explanation II.-For removal of doubt, it is hereby clarified that the credit shall not be allowed on inputs and input services used exclusively for the manufacture of exempted goods or provision of exempted service.

Issue: Following issue was made before the Adjudicating Authority:-

Whether goods cleared under job work notification 214/86 be treated as exempted and liable for payment of 5% under Rule 6(3)?

Brief Facts:

The assessee, M/s Angel Pipes & Tubes (P) Ltd. is engaged in the manufacture of S. S. Pipes & Tubes falling under subheading no.73069000 of the schedule to the Central Excise Tariff Act. 1985 and have not paid an amount equal to 5% as of the total value of the goods manufactured on job work under the provision of notification no. 214/86-CE dated 25.3.86 and cleared without payment of duty amounting to Rs. 2,62,850/- + interest during the period June to October, 2011. During the course of scrutiny of the records of the assessee, it was noticed that the assessee are engaged in the manufacture of S.S. Pipes & Tubes. It was further observed that they have also manufactured S.S. Pipes & Tubes on job work basis under notification no.214/86-CE dated 25.3.86. The supplier has supplied only S.S. Coils/Strips to the assessee. The assessee has collected job charges and cleared S. S. Pipes without payment of the Central Excise duty. It was further noticed that the assessee is availing CENVAT credit on input i.e. industrial gases (Argon, Nitrogen, Hydrogen + argon) which are being used in the manufacture of final product cleared on payment of duty and also in the manufacture of exempted goods on job work basis under notification no. 214/86-CE. The assessee was not maintaining the separate records for availing Cenvat credit on inputs used in the manufacture of dutiable final product and exempted goods. The assessee has availed Cenvat credit on input used in exempted as well as dutiable final product. As per Rule 6 of the Cenvat Credit Rules, 2004, Cenvat Credit shall not be allowed on such quantity of inputs used in or in relation to the manufacture of exempted goods, except in the circumstances mentioned in Sub Rule (2) of Rule 6.

As per Rule 6(2) of the Cenvat Credit Rules 2004 where a manufacture avails of CENVAT credit in respect of any inputs or input service and manufactures such final products which are chargeable to duty as well as exempted goods, then, the manufacturer shall maintain separate accounts for receipt, consumption and inventory of inputs or input services used in or in relation to the manufacture of exempted goods and dutiable goods and shall take CENVAT credit only on that quantity of inputs which is intended for use in the manufacture of dutiable goods. In terms of Rule 6(3) of the Cenvat Credit Rules, 2004, if the manufacturer does not maintain separate account of input or input service, he is required to pay Excise duty @5% of value of exempted goods excluding taxes, if any. From the records of the assessee it was observed that they were neither reversing the Cenvat credit involved on the inputs / inputs services consumed in the manufacture of exempted goods nor were they reversing an amount equal to 5% of the value of exempted goods at the time of their clearance. The assessee had not paid an amount of Rs. 2,62,850/- during the period June, 2011 to October, 2011 on the value of the exempted goods, which is recoverable from them along with interest in term of Rule 14 of the Cenvat Credit Rules, 2004. Further during the period from June, 2011 to October, 2011 the assessee has neither exercised an option required under law to reverse the proportionate input credit used in exempted goods nor paid Excise duty @ 5% of the value of exempted goods as well as also not maintained separate records of inputs used in dutiable and exempted goods. The assessee neither reversed the proportionate input credit used in manufacturing of exempted goods nor maintained separate records for input used in manufacture of dutiable as well as exempted goods as per rule 6(2) of Cenvat Credit Rules 2004 and so contravened the provisions of Rule 6(3) of the Cenvat Credit Rules. 2004. The Assessee have also not paid Excise duty @ 5% of value of exempted goods, thus they are liable to pay an amount of Rs. 2,62,850/- for the period from June, 2011 to October, 2011 and the same is recoverable along with interest from them under Rule 14 of the Cenvat Credit Rules, 2004. They are also liable to penal action under Rule 15 of the Cenvat Credit Rules, 2004. Thus, the assessee was issued to show cause notice.

Assessee’s Contention:

Assessee made following submissions before the adjudicating authority:-

The assessee submit that the show cause notice issued is wholly and totally erroneous and is liable to be quashed. They have availed Cenvat credit on inputs i.e. industrial gases (Argon, Nitrogen, Hydrogen + Argon) which have been used in the manufacture of dutiable final product and also in the manufacture of exempted goods on job work basis under notification no. 214/86-CE dated 25.03.1986. They further submit that as the job work was done under the above mentioned notification which itself means that the party getting its job done undertakes to process and clear the goods job worked on payment of duty and that liability of duty is at its end. This proves the fact that the final goods are dutiable and cleared on payment of duty. In other words, the job work done by them can be taken as intermediate product for the party. Since the ultimate manufacturer of such goods has paid duty on his final product there is no need of reversal of Cenvat Credit on the goods removed after doing job work. This ratio has been laid down by the Hon’ble Tribunal in the following cases:-

a)        Ballarpur Industries v/s CCE [2002 (48) RLT 221]
b)        Indian Smelting & Refining Co. Ltd. & ANR. v/s CCE, Mumbai[2003 (57) RLT 948]
c)         CCE, Chennai v/s M/s UCAL Machine Tools Ltd.-CESTAT, Chennai [2006 (74)   RLT 511 (T.)]

These decisions are clearly applicable in this case and in the light of above, it is clear that when ultimately the duty is payable on the final product, there is no need for reversing the 5% of the value of exempted goods cleared after doing the job work. Hence, the show cause notice is not sustainable and is liable to be set aside.

Further they submit that the CENVAT Credit facility is allowed to streamline 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) 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, credit would be allowed on it so long as duty is paid on the final product. The same view was taken by hon’ble Supreme Court in the cases cited below:-

a) Escort v/s CCE [2004 (171) ELT 145 (SC)]

b) Sterlite Industries (I) Ltd. v/s CCE, Pune-I [2005 (183( ELT 353 (Tri. LB)]

The above stated decision of larger bench also pertains to job work as well as reversal of Cenvat Credit under Rule 6(2) of Cenvat Credit Rules, 2004. Hence it is clearly applicable in their case also. There is clear cut judicial pronouncement in aforesaid decisions that there is no need of reversing the credit when certain inputs are used in the job work. Moreover, the appeal filed by the department against the order of larger bench in case of Sterlite Industries Ltd before Mumbai High Court has been dismissed by the hon'ble court. [2009 (244) ELT A 89 (Bom.)] This decision was also followed by Mumbai High Court in case of Tata Motors Limited v. Union of India [2009 (244)ELT 337 (Bom.). The department has not gone in appeal against these decisions and as such these decisions have become final. Further the Punjab and Haryana High Court also followed the same analogy in case of Commissioner of C. Ex. Ludhiana v. Jainsons Wool Coombers Limited [ 2011 (268)ELT 360 (P & H)] as well as in case of Commissioner of Central Excise v. Happy Forgings Limited [ 2011 (265) ELT 197 (P&H)].

Further, by relying on the decision in the case of M/s Sterlite Industries, following decisions have also been given in their favour:-
·         Bansal Precision Forge Ltd Vs CCE, Bangalore [2012-TIOL-670-CESTAT-BANG]
·         M/s Lakshmi Precision Tools Ltd Vs CCE, Coimbatore [2008-TIOL-1426-CESTAT-MAD.]
·         CCE, Bangalore Vs M/s South India Wire Products (Pvt) Ltd [2008-TIOL-1195-CESTAT-BANG.]

Keeping in view the above decisions, there is no need to pay an amount @ 5% on the goods removed after job work as duty is paid by the ultimate manufacturer. As such, the show cause notice is not legally sustainable and is liable to be quashed.

They submit that the Central Excise Rules and Notifications should be construed harmoniously so as to fulfill the purpose of their introduction in the law. The provisions of disallowing Cenvat Credit on exempted goods are contained in Rule 6(1) of the Cenvat Credit Rules, 2004 earlier known as Rule 57C. The provisions of paying 5% amount on exempted goods in case of common inputs is contained in Rule 6(3)(i) of the Cenvat Credit Rules, 2004. The job work can be done either under Rule 4(5)(a) or under Notification no. 214/86-CE dated 25.3.1986. When the job work is done under Rule 4(5)(a), there is no need of reversing 5% as goods so cleared are neither chargeable to nil rate of duty nor they are exempted. And Rule 57C or Rule 6(2) is applicable only when some goods are chargeable to nil rate of duty or are exempted. Further when job work is done while availing benefit of Notification no. 214/86; the interpretation of this Notification along with the aforesaid Rule 6(2)/57C should be done in a harmonious manner. Otherwise, the purpose of introducing these Rules or notification will be defeated. This contention is being supported by the case of Jindal Polymers vs. CCE, Meerut-III [2001 (43)RLT 680]. This decision is equally applicable in their case and in the light of this, it is clear that the Rules and Notifications are issued for the purpose of facilitating the assessees for better compliance of law and hence, they should not be read rigidly. Rather, a sophisticated analysis of the same will serve the purpose for which these are enacted. If these rules and notifications will be read as such, the ultimate aim of their formation, i.e. removing the cascading effect of duty will not be fulfilled. Thus, the show cause notice is not viable and it should be quashed and no demand should be raised against them.

They further submit that they have rightfully taken the Cenvat Credit on the inputs used in the manufacture of goods cleared under Notification no. 214/86 and there is no need of reversing the same @ 5% of the value of such goods. As such, the penalty under Section 11AC is not imposable on them. Even if the contention of the department is accepted then also penalty is not imposable as they have acted under bonafide belief that no penalty is warranted. It has been held in the various cases that when any act is done under bonafide belief no penalty is imposable. It has been held in the case of COMMISSIONER OF CENTRAL EXCISE, TRICHY Versus GRASIM INDUSTRIES LTD. [2005 (183) E.L.T. 123 (S.C.)] that where the act of assessee is based on the interpretation taken by the Tribunal, penalty cannot be imposed as the act is based on bonafide belief. Thus, since they have acted under bonafide belief, no penalty can be imposed on them.

Reasoning of the Adjudicating Authority (The Deputy Commissioner): -

The Deputy Commissioner held that the main allegation in the show cause notice is that parties have availed of Cenvat credit on certain inputs which were used as inputs in manufacture of goods cleared on payment of duty as well as the goods which were manufactured on job work basis and cleared without payment of duty under exemption Notification No. 214/86-CE dated 25.3.86. The show cause notice allege that since the inputs used in the manufacture of job work goods were not separately accounted for and stored as required under Rule 6(2) of the Cenvat Credit Rules, they were liable to pay an amount @ 5% on the value of goods cleared in terms of Notification No. 214/86. Sub-rule (1) of Rule 6 provided that Cenvat credit shall not be allowed on such quantity of inputs which is used in the manufacture of goods except in such circumstances mentioned in Sub Rule (2). The Sub Rule (2) which is obviously an exception to Sub Rule (1) read as Rule 6(2) of the Cenvat Credit Rules 2004 where a manufacturer avails of CENVAT credit in respect of any inputs or input service and manufactures such final products which are chargeable to duty as well as exempted goods, then the manufacturer shall maintain separate accounts for receipt, consumption and inventory of inputs or input services used in or in relation to the manufacture of exempted goods and dutiable goods and shall take CENVAT credit only on that quantity of inputs which is intended for use in the manufacture of dutiable goods. The whole thrust of the arguments of the assessee is that though they had not maintained separate accounts for receipt, consumption and inventory of inputs used in the manufacture of goods which were cleared by them under Notification No. 214/86-CE but they were not liable to pay any amount in terms of Rule 6(3) of Cenvat Credit Rules as goods cleared after availing exemption under Notification No. 214/86-CE were not actually exempted goods for the purpose of Sub Rule (2) and (3) of Cenvat Credit Rules. They have cited various case laws in which CESTAT has held that goods on which exemption under Notification No. 214/86-CE is availed are not at par with exempted goods since such goods are actually supplied to the principal manufacturers, who use such goods in further manufacture of final goods which are eventually cleared as per prescribed procedures.

They held that the issue was most precisely dealt with by Larger Bench of Tribunal in the case of Sterlite Industries ltd. V/s. CCE, Pune {2005(183)ELT 353- T-LB}. Though the relevant rules involved in the said case was Rule 57C of the then Central Excise Rules, 1944 which also provided that Cenvat credit shall not be allowed on the inputs used in the manufacture of exempted goods but the ratio of the judgment is applicable to the instant proceedings also. The Hon'ble Tribunal discussed the issue at length in the said order and held that the credit on inputs used in the manufacture of inputs used in the manufacture of final product cleared under job work bases was not hit for Rule 57C of the then Central Excise Rules. The said order of the Tribunal was upheld by the Bombay High Court reported at {2009(244) ELT-A-89} which has also been accepted by the department. The goods cleared without payment of duty in terms of Notification No. 214/86-CE though technically exempted goods, but still the same cannot be equated with exempted goods which are finally cleared for home consumption or export in as much as goods are intermediate goods which are further used by principle manufacturer in the manufacture of final goods which are further used by principal manufacturer in the manufacture of final goods which are cleared on payment of duty. In fact the exemption Notification no. 214/86-CE is not exactly an absolute exemption but a procedure to enable the manufacturer to encourage in job work for others and supply the goods to such principal manufacturers. Even otherwise if the job workers pays duty on such intermediate goods, the principle manufacturer would be eligible to take CENVAT credit of such duty. Thus, the demand for reversal of Cenvat credit of the goods or an amount equal to 5% of the value of goods cleared under Notification no. 214/86-CE are not sustainable.

Decision:- Demand dropped.

Conclusion:- The substance of this case is that goods cleared by job worker under the notification no. 241/86-CE though cleared without payment of duty by the job worker but cannot be equated with the exempted goods for the simple reason that the principal manufacturer ultimately clears the final product on payment of duty and if the job worker had paid the duty on their clearance, its credit would have been available to the principal manufacturer. Moreover, demanding 5% of the payment under Rule 6(3) would defeat the very purpose of removing the cascading effect.

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PJ/CASE STUDY/2012-13/43
16 February 2013

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PJ/CASE STUDY/2012-13/43
16 February 2013