Reversal of cenavt credit on consumable items

[DINESH AGGARWAL]

Dear Sir, We are manufacurer of Copper and Articles thereof ch. 74, also we are doing job work under Notification 214/86 for our customers of same product. we are taking undertaking of duty liability on final products from customers. During the AUDIT of F.y. 2002-03 , Excise Auditor were raised an audit objection para that you are availing cenvat on coman consumbale inputs, which are simunteneously using in maufacturing of dutiable final products as well as for job work under Notification 214/86. Now AUDITORS wants that we should reversed cenvat crdit on conumable items on the basis of pro-rata or @ 8% amout reversed UNDER CENVAT CREDIT RULES 6, on the jobwork goods,giving suggestion you should maintain separate inventory records of consumbale items.But our contention is that, how where, we are producing exempted goods, we are doing job work only under Notification 214/86. Please advise that we are right or department both under which rules of CE. Til date,department could not raised Show Cause Notice to us, only they reminds time to time, please clear the audit objection para of auditors.

[Surender Gupta]

In your case, the exemption under notification no. 214/86 has been provided conditionally. The goods under job work are not exempt at all. The supplier of those goods is liable to excise duty ultimately. Therefore, the audit objection is not correct. There is no need to reverse the credit.

[Madhukar N Hiregange]

Dear Dinesh, The reversal now is not 8% but 10%. However the reversal is required when inputs are used in manufactue of goods exempted under central excise. In your case the goods are excisable but the liability is transferred to the main manufacturer who may pay the duty or export the goods. Therefore in my view the demand is not justified under law. It is to be noted that department does regularly object to the same during the audits.

This issue is no longer res-integra. Notification 214/86 is not a blanket exemption given to job workers. It is a conditional Notification. The main condition is that the principal manufacturer to undertake the liability of discharging the duty on the final products manufactured out of intermediate products received from the job worker. Moreover the principal manufacturer to show proper account for the material sent, processed goods received from the job worker and the usage of such goods in the manufacture of final products at his factory. hence, the entire responsibility lies on the principal manufacturer. Normally, as per definition given in 214/86 Notification, job worker works on material supplied by the principal manufacturer. However, if he uses his own raw materials (negligible) on which credit is taken by job worker, he can still retain the credit and this would not attract the provision of Rule 6 of the Cenvat credit rules. This is a settled law by the Hon'ble Tribunal in various cases. The following decisions may be useful to the reader. a)Jindal Polymers 2001 - 135 ELT 657 LB = 2001 -TMI - 50669 - CEGAT, NORTHERN BENCH, NEW DELHI b)Shakthi Insulated wires 2003 - 151 - ELT A 89 (approved by Supreme Court) c) Sterlite Industries I Ltd - 2005 -183 - ELT 353 d) Bajaj Tempo 1994 - 68 ELt 122 e) Scan synthetics 2003 - 159 ELT 79 f) Maruti Udyog Ltd 2000 - 118 ELT 43 However, in order to avoid litigation, it is suggested to quantify the usage of consumables on a monthly basis and raise an invoice in the name of the pricipal manufacturer by reversing the proportionate credit ( as in the case of input removal as such) and pass on the invoice to the principal manufacturer to enable him to avail the credit. Since it is revenue neutral, there is no bar when job worker act as a supplier of raw materials also during the process. It is accepted by Hon'ble Tribunal in the case of Scan synthetics reported in 2003 - 159 - ELT 879. It is advised to send a detailed letter to the audit officers quoting all the judgments. Alternatively, it is advised to discuss the issue with the primary manufacturer for raising a invoice on monthly basis for the quantity of used by reversing the credit to enable the primary manufacturer to take such credit. advised accordingly s. gokarnesan advocate

AI Summary

Cenvat credit reversal: conditional exemption means principal bears duty; quantify consumable use and invoice to avoid reversal.
The notification's exemption is conditional and fiscal liability for final products lies with the principal manufacturer who must account for materials and discharge duty. A job worker who has taken credit on his own raw materials need not reverse that credit under Rule 6; tribunal precedent supports this. To avoid disputes, quantify consumable usage monthly and raise invoices to the principal reversing proportionate credit so the principal can avail the credit, maintaining revenue neutrality.