2005 (3) TMI 17 - SC - Central Excise

Cost of Waste/Scrap to be included in the value of goods manufactured by the job worker. If conversion charge get reduced by cost of wastage /Scrap it should be included since value of raw material is primary factor

Summary

Issues:
Whether the value of scrap/waste retained by a job worker should be included in the value of the component manufactured by him.

Analysis:
In this case, the Supreme Court addressed the issue of whether the value of scrap/waste retained by a job worker should be considered in the value of the component manufactured. The Court referred to a previous judgment in the case of M/s. General Engineering Works, where it was held that if the conversion charges/job work charges are affected by the job worker retaining and selling the scrap/waste, then the value of the scrap/waste must be included in the value of the component.

The contract in question contained specific terms related to conversion charges and scrap calculation. It was noted that the value of conversion charges was influenced by the job worker retaining and disposing of the scrap. The Court emphasized that the value of raw material and conversion charges are separate elements, and if the conversion charges are reduced due to the retention of scrap/waste, the value of the scrap/waste should be added to the conversion charges. This adjustment ensures that the same charge is not included twice, as wrongly assumed by the Tribunal.

The Tribunal, in its impugned judgment, incorrectly believed that including the value of scrap/waste would result in a double inclusion of charges. However, the Supreme Court clarified that adding the value of scrap/waste to the conversion charges is necessary to reflect the actual cost incurred. Relying on the principles established in the General Engineering Works case, the Supreme Court set aside the Tribunal's judgment and allowed the appeal. The order of the adjudicating authority was restored, with no costs imposed on either party.

In conclusion, the Supreme Court's decision reaffirmed the importance of considering the value of scrap/waste retained by a job worker in determining the overall cost of manufacturing a component. By clarifying the relationship between raw material, conversion charges, and scrap value, the Court provided a clear guideline for calculating the true cost of production in such scenarios.