By TIOL News Service

MUMBAI, JAN 19, 2017: THE appellant is a job worker of M/s Mahindra & Mahindra, who are inter alia engaged in manufacture of tractors .

On 09.07.2004, tractors were exempted from Central Excise duty. In the months of July 2004 and August 2004 M/s. Mahindra & Mahindra took credit on inputs. The inputs were cleared to the job worker and received back from the job worker without payment of duty under job work scheme. While clearing the tractors, the appellant paid 8% amount in terms of Rule 6(2) of the CCR.

From 1.9.2004 onwards till May 2005, M/s. Mahindra & Mahindra stopped taking credit on inputs. They cleared the goods to the job worker and received the same back without payment of duty. The said goods were used for manufacture of tractors which were cleared without payment of duty under exemption. The appellant had not claimed the benefit of Notification No. 214/86-CE.

In these circumstances, the goods manufactured at the hand of job worker appellant became liable to duty.

SCN was issued for recovery of duty of Rs.2.96croreson the job worked goods and the same was confirmed along with penalties on, both the appellant and M/s Mahindra & Mahindra .

Before the CESTAT, the appellant M/s M&M argued that though they were availing full exemption from Central Excise duty they were paying the cesses and, therefore, they were entitled to the benefit of Rule 4(5) of CCR and Notification No. 214/86-CE. The appellants also relied on the Finance (No.2) Act, 2004 levying Education Cess on excisable goods. It is further submitted that pursuant to the declaration filed under Notification No. 214/86-CE on 9.5.2005, no demand has been raised on them. Inasmuch as failure to give a declaration under Notification No. 214/86-CE for the prior period is only a procedural lapse and cannot come in the way of claiming exemption on the goods manufactured by the job worker. Lastly, it is argued that the process undertaken by the job worker of assembling into 'Rear Axle Carrier sub-assembly' does not amount to manufacture.

The AR reiterated the findings of the adjudicating authority.

The Bench observed -

Manufacture & exemption:

+ In the instant case a 'Rear Axle Carrier sub assembly' comes into existence after precision assembly of as many as ten parts …into one piece. The product is a sub-assembly and can be used in tractor of the same kind manufactured by any person. It is cleared in assembled condition from the appellants' factory and is obviously a marketable commodity. The automobile sub-assemblies are manufactured by various auto-ancillaries and there is a market of the same.

+ It is natural that such an assembly would be classifiable as part of tractor. The entry 295 of the notification 6/2002-CE exempted all goods of heading 87.01 from duty w.e.f. 9.7.2004. The entry 296 of the same notification exempted 'Parts used within the factory of production for manufacture of the goods of hearing 87.01' from whole of duty. Thus there was no exemption to parts of tractors manufactured outside the factory of products of tractors.

Notification 214/86-CE - Eligibility thereof:

+ The appellant have sought benefit of notification No. 214/86-CE. It exempts specified goods manufactured in a factory as a job work and used in or in relation to manufacture of final products on which duty of excise is leviable whether in whole or in part. In the instant case goods manufactured on job work basis are the sub-assemblies of the tractors. The tractors are fully exempt from the duty of excise, in that view it has been alleged that the appellants are not entitled to the notification No. 214/86-CE. The appellants have argued that the cess is payable on tractors, therefore, they are entitled to notification No. 214/86-CE as and the cess is a duty of excise. In this regard the term duty of excise has been interpreted by the Tribunal in the case of Mahindra & Mahindra - 2007-TIOL-534-CESTAT-MUM….

+ In view of above (decision), it is clear that the exemption notification 214/86-CE would not be applicable even if cess is paid on tractors as the cess cannot be considered to be a duty of excise for the purpose of notification 214/86-CE. Logically also the intermediate goods are exempted from duty of excise only for the reason that duty of excise on the final products is paid in the instant case. Since there is no duty on final product, duty on intermediate goods needs to be paid. In view of above, the appellants are not entitled to notification No. 214/86-CE.

+ Notification No. 214/86 is available only in the circumstances when the principal manufacturer sending the goods for job work undertakes to fulfill the duty liability if any, arising at the end of job worker. The undertaking filed under Notification No. 214/86 is not procedural requirement but a substantial requirement. Notification No. 214/86 is not a procedural notification. It is based on an arrangement where the responsibility of the duty liability of job worker, if any, is assumed by the principal manufacturer, by a special written undertaking. In absence of undertaking the responsibility cannot be transferred. It entails shifting of liability of duty for job work from the job worker to the main manufacturer. Thus, failure to file declaration under Notification No. 214/86 cannot be ignored, as it is substantive requirement and not merely procedural formalities. In view of the above, the benefit of Notification no. 214/86 cannot be extended in this case.

Revenue neutrality:

+ In the instant case, the situation is not revenue neutral as the tractors are exempted and, therefore, any duty paid on job work is not available as credit to the principal manufacturer. Further, in the said case principal manufacturer was operating under the MODVAT/CENVAT scheme. In the instant case the appellant M/s. Mahindra & Mahindra was not operating under the MODVAT/CENVATcredit scheme, in respect of tractors.

CENVAT Credit on Inputs for job work:

+ Credit of duty has to be allowed in respect of which the appellants are able to establish that the same were used in manufacture of the sub-assemblies and corresponding the duty paying documents although in the name of M/s Mahindra & Mahindra are produced.

Confiscation, Redemption fine & penalty :

+ It is seen that the goods were chargeable to Central Excise duty and there was no exemption to the goods. The appellants were required to pay duty on these goods, however, the appellants were engaged in manufacture and clearance of goods without payment of duty in these circumstances confiscation of the goods his fully justified. The goods were seized and released on provisional basis and therefore it cannot be said that the goods were not available for confiscation. Confiscation and imposition of redemption fine and penalty is upheld.

+ M/s. Mahindra & Mahindra were aware that the tractors were fully exempt from duty of excise. Still they continued to receive the said sub-assemblies without payment of duty. Penalties of Rs.10 lakhs and Rs.5 lakhs have been imposed on the two appellants while confirming a demand Rs.2.96Crores. We find that in the facts of the case the penalties are excessive. The penalties are reduced to Rs. 5 lakhs and Rs. 2 Lakhs respectively.

The appeals were partly allowed.

(See 2017-TIOL-168-CESTAT-MUM)