Cenvat credit on job-work inputs need not be reversed where process loss and scrap are used in further dutiable manufacture.

Cenvat credit on copper rods sent to job workers was not liable to reversal merely because part of the material did not return in the same form. The alleged shortage was explained as inevitable process loss, with off-cuts and scrap arising during manufacture of conductors to required length and specification. Since the scrap was retained by the job workers and used in further manufacture of other dutiable products cleared on payment of duty, and there was no evidence of diversion, unaccounted clearance, or continued identifiability of the inputs, the demand based on alleged non-return was unsustainable. The connected confiscation and penalties were also set aside.

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Issues: Whether Cenvat credit availed on copper rods sent to job workers was liable to reversal merely because part of the material was not received back in the same form, where the balance emerged as process loss, off-cuts and scrap retained by the job workers and used in further manufacture on payment of duty.

Analysis: The admitted position was that the principal manufacturer sent copper rods to job workers for manufacture of intermediate conductors. The shortage relied upon by the Revenue was explained as inevitable process loss and the emergence of off-cuts and scrap arising from the manufacturing process to meet specified length and specification requirements. Those off-cuts and scrap were not usable for the same intended purpose, were retained by the job workers, and were used in further manufacture of other dutiable products cleared on payment of central excise duty. There was no material to show diversion of inputs, unaccounted clearance, or that the retained material continued to be identifiable inputs at the job workers' end. On that basis, the demand quantified on a percentage basis for alleged non-return of inputs was unsustainable, and the connected confiscation and penalties also could not survive.

Conclusion: Reversal of Cenvat credit was not warranted and the impugned demand, confiscation and penalties were set aside in favour of the assessee.

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