Job-work valuation under Cenvat rules: free-issued inputs and scrap proceeds were not includible in assessable value.

In a job-work valuation dispute under the Cenvat/Modvat scheme, the CESTAT noted that duty-paid inputs supplied free by the principal manufacturer could not be added to the assessable value of intermediate goods manufactured by the job worker. Applying the principle in International Auto, it held that the job worker was not liable to duty on the basis adopted by the Revenue merely because the inputs were free-issued. It also rejected inclusion of scrap sale proceeds as additional consideration in these facts. On that reasoning, the duty demand, interest, and penalties were held unsustainable and the impugned order was set aside.

---

---

Issues: Whether the assessable value of goods manufactured on job work basis was required to include the value of raw materials supplied free by the principal manufacturer and the sale proceeds of scrap retained by the job worker, and whether the duty demand and penalties were sustainable.

Analysis: The goods were manufactured on job work from duty-paid inputs supplied by the principal manufacturer, who was entitled to take Cenvat credit and pass on the duty benefit. The scheme under Rule 4(5)(a) and Rule 4(6) of the Cenvat Credit Rules, 2004, as well as the earlier Modvat provisions, showed that in such a job-work arrangement the job worker was not liable to pay duty on the intermediate product merely because the inputs were supplied by the principal. The ruling in International Auto was applied to hold that the value of free-supplied inputs could not be added in the manner adopted by the adjudicating authority in these facts. The Revenue's reliance on inclusion of scrap sale proceeds as additional consideration was also repelled in view of the controlling principle applied by the Supreme Court decision.

Conclusion: The duty demand, interest, and penalties were unsustainable and the appeals succeeded in favour of the assessee.

Final Conclusion: The impugned order was set aside because the job-work clearances could not be revalued on the basis adopted by the Revenue in the presence of the applicable Cenvat/Modvat scheme.

Ratio Decidendi: Where duty-paid inputs are supplied to a job worker under the Cenvat/Modvat scheme, the job worker is not liable to duty on the intermediate product on a valuation basis that adds the cost of free-supplied inputs or treats retained scrap proceeds as includible consideration, contrary to the scheme and controlling precedent.

---