2009 (3) TMI 444 - AT - Central Excise

Value of scrap from job work excluded from assessable value; extended limitation disallowed; appeal allowed, losses reserved

CESTAT held that the value of scrap generated during job work need not be included in the assessable value of the job-produced goods, following the later ... Valuation of goods manufactured on job work basis - inclusion of scrap / wastage in assessable value - treatment of intermediate products and Modvat/Cenvat credit under job work rules - invocation of extended/longer period for demand - revenue neutrality as relevant to limitation and penaltyValuation of goods manufactured on job work basis - inclusion of scrap / wastage in assessable value - treatment of intermediate products and Modvat/Cenvat credit under job work rules - Whether the value of scrap generated and retained/sold by the job worker is to be included in the assessable value of goods manufactured on job work basis - HELD THAT: - The Tribunal applied the principle in International Auto Ltd. that where inputs supplied by the principal (and on which credit is available to the principal) are used by a job worker to manufacture an intermediate product, the job worker is not liable to pay duty on that intermediate product and the value of the supplier's inputs need not be added to the job worker's assessable value. Following that ratio, and having regard to the Modvat/Cenvat scheme and authorities which treat the intermediate product as not leviable at the job worker's hands when the input-supplier can avail credit, the Tribunal held that the scrap value arising out of conversion need not be included again in the assessable value adopted by the job worker. The Tribunal rejected the Revenue's reliance on General Engineering Works to the extent it required inclusion, noting that International Auto (and subsequent applications) govern the facts here where the inputs were supplied and credit mechanisms existed; consequently the contention that including scrap value would be required was negatived and the impugned demand set aside. [Paras 6, 8]Value of scrap need not be included in the assessable value of goods manufactured by the job worker; impugned demand on that ground is set aside.Invocation of extended/longer period for demand - revenue neutrality as relevant to limitation and penalty - Whether the longer period for issuance of the show cause notice is invocable and whether penalty could be sustained - HELD THAT: - The Tribunal found no justification for invoking the longer period. The show cause notice was founded on documents that had been furnished by the appellant to the department earlier (including ER1 returns and purchase orders), and the department could have examined those records and issued notice earlier. Further, the Tribunal accepted that duty paid by the appellant would be available as Cenvat credit to the principal (WIL), producing revenue neutrality; this circumstance militates against invoking the extended period. In view of these findings, the Tribunal held that the longer period could not be applied and, by parity, the penalty could not be sustained. The Tribunal therefore did not adjudicate fresh quantification issues and confined its decision to these legal conclusions. [Paras 6]Longer period is not invocable and penalty cannot be sustained; consequences follow and the impugned order is set aside.Final Conclusion: Appeal allowed. The demand insofar as it sought to include the value of scrap in the assessable value of goods manufactured on job work basis is set aside; the longer period for issuance of show cause notice is held inapplicable and the penalty is not sustained. Consequential relief granted. Issues Involved:1. Correct valuation of goods done on a job work basis.2. Inclusion of the value of scrap in the assessable value.3. Invocation of the longer period for demand.4. Revenue neutrality.Issue-wise Detailed Analysis:1. Correct Valuation of Goods Done on Job Work Basis:The appellants undertook the conversion of billets, slabs, and blooms of iron/MS into rim bars/sections for M/s. Wheels India Limited (WIL). The primary issue was whether the value of the scrap generated during this process should be included in the assessable value of the goods manufactured. The appellants contended that the value of the entire quantity of raw materials supplied by WIL, including the scrap, was already accounted for in the assessable value. They argued that including the value of the scrap again would result in double counting.2. Inclusion of the Value of Scrap in the Assessable Value:The appellants cited several precedents to support their argument that the value of scrap should not be included again. They referenced the Tribunal's decision in Mahindra Ugine Steel Co. Ltd. v. CCE and the Supreme Court's decision in International Auto Limited, which held that the value of scrap need not be included if it is already accounted for in the value of raw materials. The Tribunal also noted that in the case of International Auto Limited, the Supreme Court had ruled that the job worker is not liable to pay duty on the intermediate product when duty is paid on the final product. The Tribunal concluded that the value of the scrap need not be included in the assessable value of the products manufactured by the appellant.3. Invocation of the Longer Period for Demand:The Show Cause Notice was issued on 25-5-2006, covering the period from 31-1-2002 to 31-8-2005. The appellants argued that there was no suppression of facts as they had kept the department informed of all relevant details, including the terms and conditions of the conversion work. They contended that the longer period could not be invoked as the department had all the necessary information and could have issued the notice within the standard period. The Tribunal agreed, noting that the documents relied upon by the department were submitted by the appellants and that proper scrutiny could have led to an earlier notice. Therefore, the longer period was not applicable.4. Revenue Neutrality:The appellants argued that the duty paid by them on the excisable goods would be available as Cenvat credit for WIL, resulting in revenue neutrality. They cited several decisions, including ABB Ltd. v. Commissioner of Service Tax and Jameshedpur Beverages v. Commissioner of Central Excise, to support their claim that in situations leading to revenue neutrality, the longer period could not be invoked. The Tribunal agreed, noting that the duty paid by the appellants would indeed be passed as Cenvat credit to WIL, thus confirming the revenue neutrality and further supporting the non-applicability of the longer period.Conclusion:The Tribunal allowed the appeal, concluding that the value of the scrap need not be included in the assessable value of the products manufactured by the appellant. It also held that the longer period for demand was not applicable due to the absence of suppression of facts and the revenue-neutral nature of the transactions. The appeal was allowed with consequential relief.