By TIOL News Service

MUMBAI, DEC 27, 2014: THE appellant is a manufacturer of motor vehicle parts. During the course of manufacture, some parts were manufactured and sent for further processing to the job worker. Some chemicals to be utilised in the said process were also sent to the job worker. The appellants have fixed the norm of inputs and chemicals for this process. In some cases, input/chemicals were used in excess of the norms fixed by the appellant. For that the appellant has imposed penalty on the job worker to maintain efficiency and accuracy of the product.

Revenue smelt a case here.

It is of the view that since excess inputs have been used by the job worker and for which they have been penalized by the appellant, the CENVAT credit to the extent of excess inputs used should be reversed as same has not been used in manufacture of final product.

SCN proceedings ended in an adjudication order confirming the demand and imposing penalty and interest & this order was upheld by the Commissioner(A). This was in November, 2009.

The appeal was heard recently by the CESTAT.

The appellant submitted that an identical issue had come up in Bajaj Electricals Ltd. and the Tribunal vide Order no. A/249-250/10/SMB/C-IV dated 10.06.2010 Stay held that the appellant is entitled to take CENVAT credit and appeal was allowed. Therefore, it is prayed that in this case also appeal be allowed by giving entitlement of CENVAT credit.

The AR reiterated the finding of the lower authorities.

The Bench extracted the following observations of the Tribunal in the cited case -

"On careful examination of the submissions made by both the sides, I find the issue is that whether the CENVAT credit availed on purportedly higher utilization of inputs can be denied on the ground that inputs can be denied on the ground that inputs were not utilized in or in relation to the manufacture of the final product. In this case it was explained by the appellants that it is not a case of non-utilisation of input in the final product but it is a case of excess utilization on account of processing loss which may occur on account of number of technical factors like power cuts, quality of raw materials and other related factors and in order to encourage efficiency and productivity the appellant collects penal charges related to excess utilization of material by way of debit notes. So the credit cannot be denied on the ground that the inputs are not utilized, in or in relation to the manufacture of final product. Further I find that the issue involved in this case is squarely covered by the decision of Galaxy Surfactants Ltd. - 2005-TIOL-1205-CESTAT-MUM wherein it was held that "The total loss of the yield was not in one go but was over a period of time, as explained by the appellants. It may happen, in some cases that instead of getting 95% yield, the appellants may receive goods to the tune of 94.5% or so. It is the accumulated shortages, which are ultimately taken note of by the appellants, and as a part of the contract between the appellant and job worker, job charges are reduced to that effect, for which purpose the debit notes have been raised. This fact, by itself, does not give any right to the Revenue to demand duty on such shortages, when admittedly such shortages are not on account of less yield. As such, we are of the view that the impugned orders are not sustainable. The same are accordingly set aside and appeal with consequential relief."

And by following the precedent decision held that - the appellant is entitled to take CENVAT credit and are not required to reverse CENVAT credit on account of excess consumption of input.

The order of the lower appellate authority was set aside and the appeal was allowed with consequential relief.

(See 2014-TIOL-2621-CESTAT-MUM)