By TIOL News Service

MUMBAI, DEC 12, 2017: THE facts are that M/s Thermax Babcock& Wilcox Ltd. (Babcock, for short) is engaged in the manufacture of boilers and parts thereof. In respect of three boilers they availed exemption Notification No. 3/2001-CE serial No. 254.

For the purpose of manufacture of boilers, Babcock is getting the parts manufactured under Rule 4(5)(a) of CCR, 2002 from M/s Thermax Limited (Thermax, for short). Babcock was availing CENVAT credit on the inputs received partly in their factory and partly sent to Thermax for job-work and final clearance of exempted boiler.

They are paying an amount equal to 8% in terms of Rule 6 of CCR in respect of those transactions where Thermax is not paying excise duty on the ground that the job-worker is not liable for duty in terms of Rule 4(5)(a) of the Rules, at the same time Babcock is clearing the boiler under exemption Notification No. 3/2001-CE.

The department issued show cause notice on Babcock as well as on Thermax.

In respect of Thermax, the duty demand was proposed on the parts manufactured by them on behalf of Babcock.

In respect of Babcock, the excise duty demand was raised on the boilers cleared under exemption Notification No. 3/2001-CE on the ground that Babcock is clearing boilers in CKD form and not the complete boiler and, therefore, the exemption Notification is not applicable. There was also proposal for disallowance of CENVAT credit in respect of inputs sent for job-work under Rule 4(5)(a) to Thermax .

The demands raised against both Babcock as well as Thermax were confirmed by the CCE, Pune and, therefore, the appellants had filed appeals before the CESTAT.

The Division Bench had held thus -

Eligibility to exemption notification 3/2001-CE

++ The issue whether goods cleared in CKD/SKD condition is entitled for the exemption notification is covered by the various decisions. Thermax Babcock & Wilcox Ltd - 2015-TIOL-125-SC-CX and 2005-TIOL-1661-CESTAT-MUM , Rachitech Engineers Pvt Ltd 2015-TIOL-1169-CESTAT-DEL , Shree Venkateswara Engineering Corporation 2016-TIOL-908-CESTAT-MAD, Metalfab Hightech (P) Ltd 2016-TIOL-1472-CESTAT-MUM where it is held that the boiler even if cleared in CKD/SKD condition to the customer's site, the same is regarded as boiler and is eligible for exemption.

Recovery of CENVAT in r/o inputs sent to job worker:

++ It is undisputed fact that the appellants are paying 8% on the clearance of boiler under Rule 6 of the CCR, 2002. Therefore, they are entitled for CENVAT Credit in respect of inputs used in the manufacture of exempted boiler.

On the third issue as to whether job worker Thermax is liable to pay duty on parts manufactured and supplied to Babcock , the Bench held thus -

++ Rule 4(5)(a) only provides for movement of the inputs on which CENVAT credit is availed for the purpose of job-work. Rule 4(5)(a) is not the authority to grant any exemption to the job-worker from payment of duty if it arises on the manufacture of goods by the manufacturer.

++ Generally, the duty liability on the part of the job-worker remains exempted under Notification No. 214/86-CE dated 25/03/1986. However, in the said notification, there is a condition that job-worked goods should be used in the manufacture of final products of the principal and the principal, on the final products so manufactured out of the job-worked intermediate goods, should pay duty on the final product.

++ In the present case, the principal cleared the final products i.e. boiler without payment of duty under exemption Notification No. 3/2001-CE dated 01/03/2001. Therefore, even if Notification No. 214/86-CE dated 25/03/1986 is not applicable, it is very clear that any manufacturer, whether on job-work basis or otherwise, manufactures any goods, being the manufacturer of such goods, is liable to pay duty.

++ Payment of duty can only be avoided only when there is an exemption notification on the said goods. In the appellant's case, the parts of boiler manufactured by the job-worker are undoubtedly dutiable goods. When the principal manufacturer is not discharging excise duty on the boiler, the job-worker Thermax is liable to pay duty on the parts manufactured by them and supplied to Babcock.

However, the Bench observed that it did not agree with the coordinate bench decisions [in Mukesh Industries Ltd, M Tex & D K Processors (P) Ltd., Dhana Singh Synthetics Pvt. Ltd . 2015-TIOL-2271-CESTAT-AHM relied upon by the appellant, and, therefore, referred the following question to the Larger Bench for resolution:

We reported this order a year ago as 2016-TIOL-3351-CESTAT-MUM .

The Larger Bench heard the matter in July 2017 but had reserved its order then.

And has pronounced its decision recently.

In a 47-pages order, the Larger Bench has observed thus –

+ The definition of the manufacturer says that any person who is engaged in any of the activity specified in clause (i) to (iii) of Section 2(f) of the Act would be called as manufacturer. It is the manufacturer who under Central Excise Act and Rules is liable to pay duty unless otherwise exempted. The ownership of the goods is immaterial. Any person who undertakes the above activities being manufacturer, a job worker engaged in any of the said activity is a manufacturer and is thus liable to pay duty on the goods manufactured by him unless otherwise exempted.

+ Cenvat Credit Rules, 2000 and 2002 Rules were framed under Section 37 of the Central Excise Act and Finance Act, 1994. That does not vest any power to grant exemption from payment of duty. Thus the applicability of Rule 4(5) and (6) to grant exemption to the assessee i.e. job-worker from payment of duty is inconceivable.

+ In terms of the above notification (214/86-CE), it transpires that it is only in respect of goods covered by Para (1) and Para (2) of the Notification, manufactured by the jobworker, are exempted only if the same are used by the Principal Manufacturer in relation to the manufacture of final products on which duty of excise is leviable or which are cleared as such from the factory of supplier of raw material or semi finished goods either without payment of duty under bond for export or on payment of duty for home consumption.

To the Appellants contention that the job-worked goods were exempted from duty on the clearance thereof at the job-workers end, by virtue of Rule 4(5)(a) of CCR, 2001 and 2002 read with Rule 4(6) of the said Rules, the Larger Bench observed thus –

++ Perusal of the above sub rules reveal that Rule 4 (5)(a) is concerned only with permitting removal of inputs to the job-worker by the Principal manufacturer who has availed cenvat credit on such inputs. Pertinently, Rule 4 of the Cenvat Credit Rules is concerned with the conditions under which a manufacturer is allowed to avail cenvat credit. Rule 4 (5)(a) does not cast any liability of duty upon the principal manufacturer who has sent the inputs for job-work other than the condition that in case of non receipt of goods within the stipulated period he shall be liable to reverse the cenvat credit availed on such inputs. The rule is confined to the scope of cenvat credit but has no relation with manufacture, manufacturer and payment of duty on the manufactured goods.

++ Rule 4 (6) is concerned with the condition under which the finished goods, manufactured from the inputs on which cenvat credit has been availed, can be cleared by the Principal manufacturer from the premises of job worker on payment of duty or for export under Bond subject to approval of the jurisdictional Commissioner of the Principal manufacturer. This rule [4(6)] is applicable only when principal manufacturer discharges the excise duty on finished goods which is manufactured by the job worker. This Rule does not allow the job worker to remove finished goods without payment of duty. Such a situation arises in case where the cenvated inputs are sent for job-work and finished goods manufactured therefrom is cleared from the job-work premises. It is a facility to avoid the return of the finished goods to the factory of Principal manufacturer and also to save the logistic cost. Thus Rule 4(5) and Rule 4(6) have been issued under Cenvat Credit Rules, 2001 and 2002 Rules as the conditions under which cenvat credit can be allowed to a principal manufacturer and it is not a statutory provision to grant exemption from payment of duty to the manufacturer and in the present case, the job worker.

The Larger Bench further observed –

++ The jobworker being the manufacturer of goods is liable to pay duty on goods manufactured by him albeit on jobwork. The ownership of the goods is immaterial for the purpose of levy of duty and thus any person who has undertaken the activity of manufacture is liable to pay duty. In order to save the jobworker from payment of duty, the Principal manufacturer has to own the liability to pay such duty. It is only by virtue of the Notification No. 214/86-CE dt. 25.03.1986 that the liability of the job worker to pay duty is transferred to the Principal manufacturer who undertakes to pay duty.

++ There is no blanket machinery provisions in the central excise law under which the liability to pay duty is transferred from the job work manufacturer to another person i.e. Principal manufacturer. However when the Principal manufacturer does not own up the liability to pay duty on finished goods, the provision of Notification No. 214/86-CE dt. 25.03.1986 does not apply. In that case, it is the ultimate manufacturer i.e. the jobworker who has to pay the duty.

++ The goods received from the job worker were not used in the manufacture of dutiable final products but in goods on which no duty was paid. In such case when the Principal manufacture did not intend to pay duty on the final products, the jobworker who is manufacturer of intermediate goods is liable to pay duty. Non compliance of Notification No. 214/86-CE dt. 25.03.1986 by the Principal manufacture has resulted into duty liability upon the jobworker. Moreover, it is admitted by the appellant (job worker) that the inputs were not sent by the principal manufacturer under Notification No.214/86-CE. If the contention of the Appellant is accepted it would lead to the situation where neither the Principal manufacturer nor the jobworker would pay duty, which has not been legislated.

The judgments cited by the appellant were distinguished and held not applicable to the facts of the present case and the case laws cited by the Revenue were relied upon to conclude that since the principal manufacturer did not pay duty and did not follow the procedure and conditions of notification 214/86-CE, the job worker as a manufacturer is liable to duty on the job worked goods.

The Larger Bench concluded –

"8… we hold that the Job worker M/s Thermax being manufacturer of excisable goods is liable to pay duty on the intermediate goods manufactured by him on job work basis which supplied to their principal M/s Thermax Babcock…”

The reference was answered accordingly.

In passing:

Incidentally, Notification 214/86-CE saw an amendment by notification 49/2002-CX and wherein the following clause was inserted at three places in the notification -

"by a manufacturer of dutiable and exempted final products, after discharging his obligation in respect of said goods under rule 6 of the CENVAT Credit Rules, 2002; or"

Interestingly, based on the said provision, the Division Bench had in its order dated 02.12.2016 2016-TIOL-3351-CESTAT-MUM held -

"10. As regards the demand of CENVAT credit in respect of inputs supplied to job-worker Thermax under Rule 4(5)(a), we find that it is undisputed fact that the appellant are paying 8% on the clearance of boiler under Rule 6 of the CENVAT Credit Rules, 2002. Therefore, they are entitled for CENVAT Credit in respect of inputs used in the manufacture of exempted boiler. Therefore, the demand of the CENVAT credit on the inputs sent for job-work by Babcock is not sustainable."

As the old saying goes, What is sauce for the goose is sauce for the gander!

(See 2017-TIOL-4390-CESTAT-MUM-LB)