Which procedure to follow to get goods manufactured from job worker?

[Yatin Bhopi]

Dear experts,

We are manufacturing having 3 unit A, B. We wish to do sends goods for job work as below.

1. Unit A will send XYZ product (A’s Finished goods falling under chapter 29) to Unit B on payment of duty.
2. Unit B will manufactured product ABC (falling under chapter 39) from XYZ and send it to Job worker.
3. Unit B will also supply some other consumables to job worker or Job worker use his own consumables.
4. Job worker will send finished goods PQR to unit B and finally clear it on payment of duty.

Under Rule 45 (a), rule says that Input or partially processed Input on which CENVAT is availed can be send. Here product ABC is manufactured from XYZ can be treated as partially process input or it will be treated as finished goods since after manufacturing, new product will come under existence and chapter heading is also going changed from 29 to 39.

Please let me know under which procedure it will fit best i.e. Rule 45 (a) of CCR 2004, Rule 16 B of Central Excise Rule 2002 or Notification 214 \ 86 CE.

Please share your views

[Ganeshan Kalyani]

Sir, the definition of manufacturing as per Central Excise has to be analysed. If distinct product comes into existence after the process then it is new product otherwise not. Further B has carried out some activity and the resultant is new product classifiable under New chapter heading. This could be final product to outside customer , but it is not final product as far as A is concerned. He sent some material to B who does some process and sent it to Job worker for further processing and final product is what Job worker has sent to B. Thus in my view the material sent by A to B and V to Job worker are intermediate product. And Excise duty is payable on Final product only. This is my view.Thanks.

[Ganeshan Kalyani]

Sir, I also welcome views of my collegue experts on this query. Thanks.

[SURESH ASTEKAR]

Dear Shri.Yatin Bhopi,

1. As rightly stated by you in point No.1, when XYZ product is cleared by Unit A to Unit B, it has to be cleared on payment of duty since from what you say, it appears that Unit A has manufactured the product XYZ out of inputs procured by it which may be something other than XYZ. Here either Rule 4(5)(a) of CCR or job work notification 214/86-CE is not applicable. Rule 16B of Central Excise Rules is only a special provision for semi-finished goods and hence this Rule also will not be applicable. However, you have to note that the duty has to be paid on product XYZ on the value equal to 110% of the cost of production or manufacture of XYZ, in terms of Rule 8 of Central Excise Valuation Rules, 2000. The duty so paid by Unit A will be available to Unit B as credit.

2. You have further stated that Unit B also undertakes manufacturing activity viz., that it manufactures a new product ABC falling under Chapter 39 from the input product XYZ. Since a new product has emerged from an input, it becomes liable to duty and cannot be cleared without payment of duty under Rule 4(5)(a) of CCR. Of course, if the product ABC is captively consumed within the factory of Unit B itself for manufacture of PQR, you may claim benefit of Notification No.67/1995-CE, provided PQR is liable to duty or is covered by the exclusions provided in the said notification.

3. Notification No.214/86-CE may not be available for clearance of fully manufactured goods since the said Notification mandates that the supplier of the raw materials or semi-finished goods has to give an undertaking. Further, since Unit B has fully manufactured product ABC, it cannot be removed from the factory of manufacture without payment of duty, unless it is captively consumed within the factory of manufacture.

4. When product ABC is removed from Unit B, the duty has to be paid again under Rule 8 of Valuation Rules as in the case of clearance from Unit A, since the job worker will be manufacturing the goods PQR on behalf of Unit B i.e., the input supplier. The duty paid by Unit B on 110% of the cost of production will be available as credit to the job worker. If the job worker procures further inputs for manufacture of PQR, he can take the credit of the duty paid thereon. If Unit B supplies some other consumables, the same may be supplied to the job worker under duty-paying documents so that the job worker can take credit of the duty paid thereon.

4. When job worker clears PQR to unit B, he has to pay duty under Rule 10A of the Valuation Rules.

[Yatin Bhopi]

Dear Sir

Thanks for your detailed replay.

Product ABC is not going to use further costively in unit B. This product is manufacture only for producing PQR from Job worker since manufacturing facility of PQR is not available in unit B.

Please let me know under which procedure we have option to pay duty on ABC @110% by unit B and job worker under rule 10A. Is there any other procedure other than mentioned by me?

[SURESH ASTEKAR]

Dear Shri.Yatin Bhopi,

Since product ABC is manufactured by Unit B [out of product XYZ manufactured by Unit A], duty needs to be paid while clearing product ABC. Since ABC is used for manufacture of PQR on behalf of Unit B by the job worker and it is not sold by Unit B to the job worker, Rule 8 of Valuation Rules, which is reproduced below, gets attracted:

"8. Where whole or part of the excisable goods are not sold by the assessee but are used for consumption by him or on his behalf in the production or manufacture of other articles, the value of such goods that are consumed shall be one hundred and ten per cent of the cost of production or manufacture of such goods."

Therefore, Unit B needs to clear the goods to job worker on payment of duty at 110% of the cost of production.

Further, the valuation in the case of job worked goods has to be done in terms of Rule 10A of the Valuation Rules, which is as under:

"10A. Where the excisable goods are produced or manufactured by a job-worker, on behalf of a person (hereinafter referred to as principal manufacturer), then,-

(i) in a case where the goods are sold by the principal manufacturer for delivery at the time of removal of goods from the factory of job-worker, where the principal manufacturer and the buyer of the goods are not related and the price is the sole consideration for the sale, the value of the excisable goods shall be the transaction value of the said goods sold by the principal manufacturer;

(ii) in a case where the goods are not sold by the principal manufacturer at the time of removal of goods from the factory of the job -worker, but are transferred to some other place from where the said goods are to be sold after their clearance from the factory of job-worker and where the principal manufacturer and buyer of the goods are not related and the price is the sole consideration for the sale, the value of the excisable goods shall be the normal transaction value of such goods sold from such other place at or about the same time and, where such goods are not sold at or about the same time, at the time nearest to the time of removal of said goods from the factory of job-worker;

(iii) in a case not covered under clause (i) or (ii), the provisions of foregoing rules,wherever applicable, shall mutatis mutandis apply for determination of the value of the excisable goods:

Provided that the cost of transportation, if any, from the premises, wherefrom the goods are sold, to the place of delivery shall not be included in the value of excisable goods.

Explanation.- For the purposes of this rule, job-worker means a person engaged in the manufacture or production of goods on behalf of a principal manufacturer, from any inputs or goods supplied by the said principal manufacturer or by any other person authorised by him."

As per my understanding the method suggested by me is very simple, uncomplicated, and feasible, and litigation free.

[Suryanarayana Sathineni]

Dear Friends,

In my view, the right procedure is Rule 4(5) (a) of CCR,2004 presuming that the Product XYZ received from Unit A on payment of duty is an input to unit B and avails cenvat and Unit B manufacture ABC by using such XYz and the same along with other inputs ,unit B would be sending for job work and after conversion the Job worker send back the converted product PQR which ultimately sell from Unit B.

Best Regards

Suryanarayana

[SURESH ASTEKAR]

With due respect to the views of Shri.Suryanarayana, I would like to invite attention to the provisions of Rule 4(5)(a) under which only "inputs as such or after being partially processed" are sent to a job worker. The crucial point to be considered here is that Unit B which receives product XYZ as inputs which fall under Chapter 29 and converts them into product ABC falling under Chapter 39. Thus, there is a complete transformation of the inputs received from Unit A by Unit B. Therefore, provisions of Rule 4(5)(a) will not be applicable. Another fundamental point to be considered here is that incidence of duty of Central Excise is on the act of "manufacture" and the moment any goods come into existence as a result of "manufacture", duty becomes payable, although its payment / collection is deferred to the point of its removal. It may be noted that even if any excisable goods emerge within the factory of manufacture and are captively consumed for manufacture of other products, duty becomes payable on the goods that emerge as excisable goods at one stage of manufacture. Of course, in order to avoid payment of duty and taking of the credit for the goods captively consumed, the Government has issued Notification No.67/95-CE. Further, this exemption is applicable only if the goods manufactured from excisable goods that emerge at the initial stage, are liable to Central Excise duty and are not exempted goods. Of course, there are certain exceptions to this as provided in Notification No.67/95-CE.

Since Unit B manufactures product ABC and what is cleared from Unit B is not XYZ (inputs received from Unit A) either as such or after being partially processed, the removal of ABC from Unit B has to be on the payment of Central Excise Duty.

[Yatin Bhopi]

exactly sir

That's why I also pointed out this in my query regarding job work under Rule 45 (a).

I am confused in phrase partially process input and semi finished goods.

[SURESH ASTEKAR]

Dear Shri. Yatin Bhopi,

Partially processed means there is no complete manufacture i.e., the process carried out does not amount to manufacture in the sense a new product (distinct from the input on which the process was carried out) which is known distinctly in the market, does not emerge. In the case of semi-finished goods the same logic applies.

[Suryanarayana Sathineni]

Dear Friends,

It is not clear in the query whether the product manufactured by unit B (ABC) is an intermediate( partially processed ) or a final product where as I presumed it is an intermediate. Further, even if the product received back from Job worker (PQR) by unit -B , is a final product, then also unit -B cannot be sold it as it is from its factory unless they carry out final packing and required labeling etc. which is considered as further process which squarely covers under Rule 4(5)(a) of CCR,2004.

If it is otherwise, then the unit may have to proceed either under Rule 16(b) of CER,2002 or NF 214/86-CE

Best Regards

Suryanarayana

AI Summary

Manufacture vs input classification: duty arises when processing yields a new product; clearance and valuation rules then apply. Where an operation on received goods produces a distinct new product, that transformation amounts to manufacture and excise duty is payable on removal of the newly manufactured article; inputs or partially processed materials may be sent to job-workers under job-work procedures, but fully transformed goods cannot be treated as partially processed and must be cleared on payment of duty, with valuation and credit governed by applicable valuation rules and notification-based exemptions where conditions are met.