Job work exemption and Cenvat credit: capital goods credit allowed where duty was paid at the principal manufacturer's stage.

Capital goods used by a job worker to manufacture semi-finished goods cleared to the principal manufacturer under the job work exemption were not treated as being used in the manufacture of exempted final products for Modvat/Cenvat purposes. The governing principle was that where duty is ultimately paid at the principal manufacturer's stage, the job worker's clearance without duty does not attract the restriction meant for wholly exempted final products. The special job work procedure was applied to preserve the anti-cascading purpose of the credit scheme, and contrary departmental reliance was distinguished. Credit was therefore admissible, and the demand, interest, and penalty could not be sustained.

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Issues: Whether capital goods used in the manufacture of goods cleared without payment of duty under job work procedure to the principal manufacturer could be treated as used in the manufacture of exempted final products so as to deny Modvat/Cenvat credit.

Analysis: The goods manufactured at the job worker's unit were semi-finished goods cleared under delivery challans to the principal manufacturer under the job work exemption. The governing principle is that where duty is ultimately paid at the principal manufacturer's end, the goods cleared by the job worker without payment of duty are not to be treated as exempted final products for the purpose of denying credit. The special procedure for job work prevents a mechanical application of the credit restriction and avoids defeating the scheme's purpose of preventing cascading of duty. The earlier decisions relied upon by the Department were distinguished, while the Supreme Court and later Tribunal and High Court decisions recognized that job-worked goods do not attract the bar intended for wholly exempted final products.

Conclusion: Credit on the capital goods used for such job-worked manufacture was admissible, and the demand, interest, and penalty could not be sustained.

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