Pradeep Jain - Chartered Accountant

PJ/CASE STUDY/2010-11/06

27 May 2010

PJ/CASE STUDY/2010-11/06

Case Study

Prepared By:

CA Pradeep Jain and

Megha Jain

Introduction:- The Rule 6 or erstwhile Rule 57CC has created many problems on reversal of Cenvat credit. The reversal is to be done on the cost of exempted product. This rule does not see whether a very small quantity of input or input services have been used in manufacture of exempted final product. It has to be reversed at a fixed rate of value of exempted goods. Normally, this creates a lot of problem.

In the instant case, the scrap was generated during manufacture of final product. The scrap was exempted from levy of duty. The department has demanded reversal @ 10% of value of exempted product. But the appellant contended that the scrap is not final product but it is by product which is generated automatically. This case study relates to this topic only.

M/s Shivam Metals versus Assistant Commissioner, CE Division Jodhpur

Relevant Provisions:-

Rule 6 (3)(b) of Cenvat Credit Rules 2004

if the exempted goods are other than those described in condition (a), the manufacturer shall pay an amount equal to ten per cent. of the total price, excluding sales tax and other taxes, if any, paid on such goods, of the exempted final product charged by the manufacturer for the sale of such goods at the time of their clearance from the factory;

Question of consideration:-

Whether the exempted stainless steel scrap & waste should be cleared after reversing an amount equal to 10% of the value as per Rule 6 (3) (b) of the Cenvat Credit Rules, 2004 or not?

Brief Facts of the Case: -

· Appellant are engaged in the manufacture of cold rolled stainless steel patta / patti(dutiable) and stainless steel scrap & waste (exempted) falling under tariff heading Nos. 7219 90 and 7204 21 respectively. The appellants were availing cenvat credit on the inputs. Stainless Steel Scrap & Waste are exempted by Notification No. 3/2005-CE, Dated: 24.02.2005. Since appellants were not maintaining separate account for inputs used in dutiable and exempted goods, therefore as per Rule 6(3)(b) of Cenvat Credit Rules, 2004, the appellants should have cleared the said scrap after reversing an amount equal to 10% of the value of such exempted goods at the time of their clearances from their factory. The appellants had not reversed the said amount, therefore, demand of duty for the period 1.8.2006 to 31.12.2006 was confirmed by the Adjudicating Authority under the provisions of Rule 14 of the CCR, 2004 alongwith interest under Section 11AB of the CEA, 1944 and also imposed penalty under rule 15 of the CCR, 2004.

Appellant’s Contention:-

There was no need to reverse the Cenvat Credit as SS Scrap is not their final product but it is a by product. The appellant has relied upon the following cases.

(a) Tata chemicals Limited [2007 (214) ELT 95 (Tri.)]

(b) Rallies India Ltd. [2007 (208) ELT 25 (Tri. LB)]

Reasoning of the Order: -

Commissioner finds that the same issue has been decided by the commissioner (A-II), Jaipur in the case of Jai Steels, Shiva Steels and Suncity Metals by holding that appellants were required to pay amounts in terms of Rule 6 (3) (b) of CCR, 2004. Being aggrieved appellants filed appeal before tribunal who set aside the orders of Comm (A) by holding that the scrap has arisen only as a by product and therefore
Rule 6(3) (b) of the CCR, 2004 is not applicable. The orders of the Comm (A) are set aside and the appeals are allowed with consequential relief as per law.

Decision of the Adjudication authority:-

Based on the above judgment, Commissioner held that scrap has arisen only as a by product and therefore Rule 6 (3) (b) of CCR, 2004 is not applicable. Accordingly, Commissioner set aside the findings of the adjudicating authority. Since demand is not sustainable therefore question of interest does not arise and penalty is also not imposable in view of the Hon’ble Supreme Court’s Decision in the case of H.M.M. Ltd. 1995 (76) ELT 497. The impugned order is set aside and appeal is allowed.

Comments: -

This is very good decision. It is crystal clear that the scrap is not final product and it generates automatically. No one undertook the manufacturing process for the generation of scrap. This is fundamental rule. Even the Apex Court has held in many cases that scrap is not a marketable commodity. Even if it fetch some value, it does not mean it is marketable. Even the rubbish things can be sold in the market. But the amendment in definition of manufacture under Section 2(f) has been done by the Board to nullify these decisions.

But the decisions have given support to the contention that scrap is not final product and it generates automatically in manufacture of final product. No manufacturer undertakes manufacturing activity for generation of scrap.

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PJ/CASE STUDY/2010-11/06
27 May 2010

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