The Bangalore bench of the Customs, Excise & Service Tax Appellate Tribunal (CESTAT)has held that no penalty under Excise Rules since the supplying of raw material as a job worker does not amount to manufacture under section 2(f)(ii) of Excise Act, 1944.
3M India Ltd, the appellant filed a petition to assail the order dated January 19, 2016, passed by the Commissioner of Central Excise, Bangalore III, Commissionerate Bengaluru, to the extent it has imposed a penalty of Rs. 1,51,00,000/- upon the appellant under rule 26 of Central Excise Rules, 2002.
The appellant is engaged in the manufacture and trading of various products in diverse sectors, such as transportation, health care, electrical and communications. The appellant inter alia engages various job workers for performing product services by supplying raw materials and packing materials.
The appellant contends that where the activity undertaken by the job worker amounts to manufacture, it discharges the applicable excise duty on the said goods in the capacity of the principal manufacturer, but in cases where the process undertaken by the job worker does not amount to manufacture, excise duty is not paid and in such cases, the appellant instructs the job worker to discharge service tax.
In BB warehouse one of the premises of the assessee, the appellant receives raw materials, avails CENVAT credit on the eligible raw materials and dispatches the same to the job worker for the manufacture of excisable products. Upon receipt of the manufactured goods from the job workers, the appellant clears the same from the BB warehouse upon payment of excise duty.
The appellant sends the materials to the job worker and the processed goods received back from the job worker are sold by the appellant without payment of excise duty, as according to the appellant the activities undertaken by the job worker do not amount to manufacture.
A show causes notice 22.05.2015 was issued by the Additional Director General to the job worker, the appellant, and some of the employees of the appellant and the job worker proposing tax. The replies of the appellant were denied and the demand was confirmed by the Commissioner.
In terms of section 2(f)(ii) “manufacture” would include any process which is specified about any goods in the Section or Chapter notes of the First Schedule to the Central Excise Tariff as amounting to manufacture.
A Coram comprising of Justice Dilip Gupta, President Mr C.J Mathew, Member (Technical) observed that the activity undertaken by the job worker would not amount to manufacture even under the third limb of the Chapter note.
Further concluded that the process undertaken by the job worker would not amount to manufacture in terms of section 2(f)(ii) of the Excise Act read with note 6 of Chapter 34 or note 10 of Chapter 38 of the Central Excise Tariff. While allowing the appeal, the Tribunal held that the penalties could not have been imposed either upon the employees of the appellant or the employee of the job worker and set aside the impugned order.
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