CESTAT Allows CENVAT Credit on Job Work Capital Goods as Duty Was Paid by Principal Manufacturer on Final Products [Read Order]

The Allahabad Bench of Customs, Excise and Service Tax Appellate Tribunal (CESTAT) allowed CENVAT credit on capital goods used for job work, ruling that denial of credit was not justified when duty was paid by the principal manufacturer on the final products.

UKB Electronics Pvt. Ltd.,appellant-assessee, was engaged in manufacturing electrical components at its Noida unit, which included both a DTA unit and a 100% EOU unit separated by a wall.

In September 2010, Central Excise officers visited the premises and found that the appellant had wrongly availed CENVAT credit of ₹36.13 lakh on capital goods used for job work. The credit was reversed immediately. It was also found that some machines meant for the EOU unit were uninstalled and transferred to other units. A cheque of ₹6.71 lakh was submitted, followed by a letter stating the credit was admissible and would be contested.

Further investigation revealed that the appellant had undertaken job work for a principal manufacturer without obtaining the required undertaking under Notification No. 214/86-CE. It was also found that imported “Housings” were diverted to the appellant’s Pune unit. Initially, usage details were not submitted and were only provided in August 2012.

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A Show Cause Notice was issued in March 2013 alleging wrongful availment of CENVAT credit, diversion of imported goods, and unauthorised transfer of machinery. The Commissioner confirmed the demands through Order-in-Original dated 12.03.2014, with a reduced duty demand of ₹49.60 lakh on the housing issue.

On appeal, the Tribunal remanded the matter in September 2018 for fresh adjudication. In the remand proceedings, the appellant submitted new documents and explanations. However, by order dated 10.09.2020, the adjudicating authority again confirmed demands of ₹36.13 lakh, ₹49.60 lakh, ₹9.04 lakh, and ₹32,761, along with interest and penalties. A small demand of ₹1.58 lakh was dropped. Personal penalties were also imposed on the director.

Both the appellant and its director challenged this order before the Tribunal. The department also appealed, seeking enhancement of penalty under Section 114A of the Customs Act.

The two member bench comprising P.K Choudhary (Judicial Member) and P.Anjani Kumar(Technical Member) heard both sides and examined the records.It noted that the demand of ₹36.13 lakh in CENVAT credit was raised on the ground that the capital goods were used by UKN for job work, and the required undertaking from the principal manufacturer under Notification No. 214/86-CE was not submitted.

However, the tribunal referred to the Madras High Court’s decision in Kyungshin Industrial Motherson Ltd., which held that goods manufactured on job work basis are not exempted goods, and therefore, Rule 6 of the CENVAT Credit Rules did not apply. It also relied on Supreme Court and tribunal rulings in Escorts Ltd. and Sterlite Industries Ltd., which clarified that credit could not be denied for goods cleared without duty under job work procedures, as long as duty was ultimately paid on the final product.

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The appellate tribunal noted that various High Courts, including Madras, Telangana, and Allahabad, had consistently held that goods manufactured under job work and cleared without payment of duty under Notification No. 214/86 were not to be treated as exempted goods.

It found that credit on capital goods and inputs used in job work was allowable, as the final products manufactured by the principal were dutiable. The decisions in Sterlite Industries, Kyungshin, SRF Ltd., and others supported this view.

The tribunal concluded that Rule 6(4) of the CENVAT Credit Rules, which restricts credit on capital goods used in exempted goods, did not apply to such job work clearances.

The bench held that the benefit of Notification No. 214/86 could not be denied just because the principal manufacturer did not submit an undertaking, especially when duty on the final product was paid. The ER-1 return showing this payment was on record and not disputed.

It found the conclusion that the assessee failed to show taxability of job-worked goods to be incorrect.Even if the benefit of the notification was denied, the department should have demanded duty on the job-worked goods. Since no such demand was made, the denial of CENVAT credit on capital goods and the reversal of ₹36,13,490 was not justified.

Therefore,the appeal was allowed.

To Read the full text of the Order CLICK HERE

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