PRINCIPAL MANUFACTURER IS NOT LIABLE TO PAY DUTY ON WASTE AND SCRAP GENERATED AND SOLD BY JOB WORKER

[Mr. M. GOVINDARAJAN]

It is inevitable in the industry of any type to assign work to the job worker.  There are many issues involved in the principal manufacturer and the job worker. One among the problem is whether the principal manufacture is liable to pay duty on waste and scrap generated and sold by the job work. This problem is discussed in this article with reference to decided case laws.

In ‘International Tobacco Co. Ltd V. Commissioner of Central Excise, Ghaziabad’ – [2003 -TMI - 52425 - CESTAT, NORTHERN BENCH, NEW DELHI] it was held that when no process of manufacture of waste and scrap has taken place at the end of principal manufacturer, duty cannot be demanded from the principal manufacturer. 

In ‘M/s Emco Limited V. Commissioner of Central Excise, Mumbai’ – [2007 -TMI - 3638 - CESTAT, MUMBAI] it was held that waste and scrap used at the end of job worker cannot be held to be dutiable in the principal manufacturer’s hands.

In ‘M/s Rocket Engineering Corporation Limited V. Commissioner’ – 2006 -TMI - 3721 - HIGH COURT BOMBAY the following are the question of law arises for consideration of the High Court-

A. Whether the assessee i.e., the supplier of inputs to the job worker is liable to pay central excise duty on the scrap generated at the job worker end, which is not received back from the job worker within the specified time in terms of Notification No.214/86-CE, dated 25.03.1986 as amended in r/w Rule 4(5)(a) of CENVAT Credit Rules?

B. Whether scrap generated at the job worker end out of the processing of the inputs is required to be returned to the supplier and, if it is not returned back whether the supplier of inputs is required to pay appropriate central excise thereon?

The High Court held that it is not in dispute that the assessee had paid duty on the scrap generated at the factory of the job worker for the period April 1999 to March 2000. There is no liability on the principal manufacturer after 31.03.2000 in view of amended Rule 57AC of the CENVAT Credit Rules.  Therefore no substantial question of law arises in this appeal.

In ‘FAG Engineering (I) Limited V. Commissioner of Central Excise, Vadodara’ – [2011 -TMI - 202740 - CESTAT, AHMEDABAD] the appellant is engaged in manufacture of various types of balls and roller bearings falling under Chapter 84 of First Schedule to Central Excise Tariff Act, 1985.   The appellant is availing the benefit of CENVAT credit of duty paid on the inputs i.e., seamless tubes and steel bars.   After availing the CENVAT credit, the said inputs were being supplied to the job worker for carrying the requisite intermediate processes.   During the course of such intermediate processes, waste and scrap was also being generated at the end of job worker and the waste and scrap so generated was being sold by the job worker and was not being returned by them to the appellant.   However the appellant was paying duty on such waste and scrap generated at the job worker’s end and sold by them by considering the generation as 15%.

During the course of investigation, statements of various persons were recorded and it was found that generation of scrap, in respect of DTA unit was to the tune around 44.3% of the quantity of seamless tubes supplied by the appellant and in respect of 100% EOU, the same was to the tune of around 22.4% of the quantity of steel bars supplied by the appellant.   As such, proceedings were initiated against the appellant by way of issuance of show cause notice seeking to confirm central excise duty on actual quantity of scrap generated at the end of job worker in terms of provisions of Sec. 11A of Central Excise Act, 1944 along with interest and penalty.   The Commissioner confirmed the demand along with interest and penalty of equal amount.   The Commissioner has relied upon the provisions of Rule 4 and Rule  4(5)(a) of CENVAT Credit Rules, 2004 and concluded that waste and scrap generated at the job worker’s end was required to be returned to the appellant’s factory, who were duty bound to clear the same on payment of duty.    The Commissioner further held that this is not a case of recovery of wrongly taken CENVAT credit, so as to invoke the provisions of Rule 12/14 of CENVAT Credit Rules.   He held that this is a case of short levy of Central Excise duty, which can be demanded under Section 11A of Central Excise Act.  Accordingly he has invoked the extended period of recovery of differential duty not paid on the waste and scrap.

Being aggrieved against the order of the Commissioner, the appellant filed the present appeal before the Tribunal.  The appellant contended that they are not the manufacturer of waste and scrap and in terms of provisions of Section 3 of the Central Excise Act, 1944.   The duty can be demanded from the manufacturer i.e., one who has actually manufactured the excisable goods.   The waste and scrap has arisen in the hands of the job worker, who was the manufacturer, duty liability, if any can be demanded from the job worker only.

The Court analysed the provisions of Rule 4(5)(a) of CENVAT credit Rules.   It is clear from the said rule, as assessee who has availed the MODVAT credit on inputs to a job worker for the specified purposes, the goods are required to be received back in the factory of the assessee within a period of 180 days of their being sent to a job worker.   The consequence of non receipt of such goods is that the MODVAT credit originally availed by the manufacturer is required to be reversed.   As such in terms of the above, no duty liability can be fastened upon the principal manufacturer, in case of non receipt of goods, but the consequence would be reversal of the credit availed on the inputs. 

The Court further held that duty is being demanded by treating them as a manufacturer of waste and scrap, which is factually incorrect.   The present provisions of Rule 4(5)(a), when compared with erstwhile Rule 57F(4) of Central Excise Rules, 1944 makes a clear distinction inasmuch as the said Rule nowhere requires the return of waste and scrap generated at the job worker’s end.  The Court set aside the confirmation of differential duty, interest and imposition of penalty upon the appellant by holding that the appellant was under no obligation to pay the duty on waste and scrap used at the job worker’s end and sold by them.