2023 (6) TMI 1194 - AT - Central Excise

Tribunal rules in favor of manufacturer on Cenvat Credit Scheme dispute.

M/s. Haldia Petrochemicals Limited Versus Commissioner of Central Excise, Haldia

The Tribunal ruled in favor of the appellant, a manufacturer under the Cenvat Credit Scheme, in a case involving short receipt of processed inputs from ... Reversal of pro-rata CENVAT Credit - short receipt of the processed inputs from the premises of the job workers - Rule 4(5)(a) of the CCR - HELD THAT:- The wastage/scrap generated in the course of job work, being less than 10% for PP Granules and 5% for LLDPE Granules was within the prescribed SION norms and the existence of such wastage/scrap in the process of conversion is provided for not only in the Work Orders but also in the permission conferred by the Jurisdictional Commissioner under Rule 4(6) of the CCR. Further, the claim of the Appellant that the job worker had discharged duty on the waste/scrap at the time of his clearance is also supported by job work Challans, excise Invoice besides the Order dated 9 June 2006 passed by the Assistant Commissioner in the connected proceedings. The issue involved herein is also covered by the decision of this Tribunal in EMCO LTD. VERSUS COMMISSIONER OF CENTRAL EXCISE, MUMBAI-III [2007 (11) TMI 108 - CESTAT, MUMBAI] where it was held that supplier can not be held liable on the ground that the worker had not discharged duty liability on impugned waste and scrap. Irrespective of whether the job worker had discharged the duty liability on the scrap generated at hisend, the duty liability cannot be fastened on the principal manufacturer/supplier of inputs. Appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether pro-rata reversal of Cenvat credit is required under Rule 4(5)(a) of the Cenvat Credit Rules for inputs/semi-processed goods sent to job workers but not received back due to short receipt at the job-worker's premises. 2. Whether wastage/scrap generated in the course of job-work, when within prescribed SION/technical norms and the limits specified in work orders or permitted under Rule 4(6), attracts reversal liability on the principal manufacturer/supplier. 3. Whether discharge of excise duty by the job worker on waste/scrap that is cleared from the job worker's premises affects the liability of the principal manufacturer/supplier to reverse Cenvat credit. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Requirement to reverse pro-rata Cenvat under Rule 4(5)(a) for short receipt from job worker Legal framework: Rule 4(5)(a) of the Cenvat Credit Rules requires certain reversals where inputs sent to job workers are not received back within the prescribed period. Rule 4(6) permits certain permissions in respect of job-work handling. The Board circular (para 5) clarifies that Cenvat credit is admissible in respect of inputs contained in waste, refuse or by-product. Precedent treatment: The Tribunal in prior decisions addressing identical factual matrices held that the duty cannot be fastened on the principal supplier where the loss/shortage arises from waste/scrap generated in legitimate processing at the job worker's premises; that approach was affirmed by a High Court decision relied upon in those tribunals. The present decision follows those Tribunal and High Court pronouncements. Interpretation and reasoning: The Court examined whether the alleged short receipt amounted to a taxable evasion triggering reversal under Rule 4(5)(a). Finding that the short receipt resulted from wastage/scrap generated in the course of conversion of polymer granules into woven sacks, and that such wastage levels (8.36% for PP and 5.02% for LLDPE; average 7.50%) were within prescribed SION norms and contractual/work-order allowances, the Court treated the short receipt as expected loss in processing rather than disappearance attracting reversal. The record also showed the jurisdictional authority had granted permissions under Rule 4(6), and contemporaneous documentation supported that the job worker handled/cleared the waste and, in some instances, discharged duty thereon. Ratio vs. Obiter: The holding that pro-rata reversal under Rule 4(5)(a) is not attracted where short receipt arises from waste/scrap in the course of job work (and is within prescribed norms or permitted under Rule 4(6)) is ratio. Observations regarding supporting documents and connected administrative orders are consequential but not obiter. Conclusions: Pro-rata reversal under Rule 4(5)(a) was not required on the facts where wastage/scrap fell within applicable norms and permissions; the demand based on alleged short receipt cannot be sustained. Issue 2 - Effect of SION norms, work-order allowances, and Rule 4(6) permissions on reversal liability Legal framework: SION (Standard Input-Output Norms) and notifications prescribing norms for specific finished goods establish acceptable input-to-output variances. Work orders between supplier and job worker may contractually provide for permissible wastage. Rule 4(6) authorizes the Commissioner to grant permissions relating to job work handling. The Board circular recognizes Cenvat on inputs contained in waste/refuse/by-product. Precedent treatment: Tribunal authorities have given effect to SION norms and administrative permissions, treating permissible loss as not attracting reversal liability on the principal. The present Tribunal expressly follows these authorities. Interpretation and reasoning: The Court treated SION norms, contractual allowances in work orders, and administrative permissions under Rule 4(6) as material to determine whether short receipt was an excisable event imposing reversal on the principal. Where wastage percentages were within SION/work-order limits and where the Commissioner had effectively acknowledged generation of waste by granting permission, the Court concluded that the loss is a recognized processing outcome and does not trigger reversal. The Board circular reinforces that inputs contained in waste remain eligible for Cenvat treatment. Ratio vs. Obiter: The proposition that recognized norms, contractual terms and official permissions negate reversal liability is ratio insofar as it directly informs the legal conclusion on reversal; ancillary comments on the weight of each form of evidence are explanatory. Conclusions: Wastage/scrap within prescribed SION norms and permitted under Rule 4(6), and provided for in work orders, precludes treating short receipt as a basis for pro-rata reversal of Cenvat against the principal manufacturer/supplier. Issue 3 - Impact of job worker's discharge of excise duty on waste/scrap on supplier's liability Legal framework: Cenvat rules and the Board's circular contemplate treatment of inputs found in waste/refuse/by-products. The statutory scheme distinguishes between job-worker actions and principal manufacturer liabilities depending on the context and applicable rules. Precedent treatment: Tribunal and High Court precedents, relied upon by the Court, have held that even if the job worker had not discharged duty, history of decisions indicates the duty liability in such circumstances ought not be fastened on the principal supplier for waste generated during job work. Conversely, where job worker discharges duty on waste/scrap, that fact supports the absence of supplier's liability. Interpretation and reasoning: The Court considered job-worker documentation (challans, excise invoices) and an earlier administrative order indicating the job worker discharged duty on waste/scrap. Whether or not the job worker actually discharged duty, reliance on binding precedent led the Court to conclude that duty demand cannot be sustained against the principal supplier. The Board circular's explicit statement that Cenvat credit is admissible in respect of inputs contained in waste fortifies this conclusion. Ratio vs. Obiter: The determination that a job worker's discharge (or non-discharge) of duty does not, by itself, impose reversal liability on the supplier in the factual category before the Court follows precedent and is treated as ratio. Remarks on documentary proof of discharge are evidentiary and explanatory. Conclusions: The presence of evidence that the job worker discharged excise on waste/scrap, together with precedent and Board guidance, removes any basis to fasten reversal liability on the principal supplier for the short receipt in issue. Overall Conclusion and Disposition On the combined analysis of Rule 4(5)(a), Rule 4(6) permissions, SION norms, contractual allowances, documentary evidence of duty clearance by the job worker, the Board circular, and controlling judicial precedents, the Tribunal held that the confirmed demand for pro-rata reversal of Cenvat credit could not be sustained and therefore set aside the impugned order with consequential relief.