JOB WORK & SEMI FINISHED GOODS – A LOT OF CONFUSION?

 

 

by

 

K. VIJAY KUMAR¹

MA, BL, B.Ed, MBA

Superintendent of Central Excise

 

1.    Removal of Modvat inputs, Job work and clearances of semi finished goods have been subject matter of a lot of un necessary debate and confusion because departmental officers as well as assessees tend to treat them all together without independently understanding each concept, at the same time arguing that each has an independent existence. One such article appeared in ELT recently. 1999(111)ELT A80, in which the learned author after a thorough analysis of the provisions came to the peculiar conclusion that if the manufacturer of the raw materials or semi finished goods can not remove without payment of duty to a job worker for conversion for use in the manufacture of final products, there is no necessity for issue of a notification no.214/86.

 

2.    Let us see the position clearly.

 

First let us take Modvat inputs.

What is to be done with the inputs received and on which credit has been taken? Obviously use them for manufacture of final products. After all that is what the inputs have been procured for. A manufacturer who has procured inputs may not ise all the inputs received by him. He may not need part of it or he may need money urgently, whch he can generate by selling the stocks of inputs lying with him. So the law allows him to remove the inputs for home consumption or for export under bond. (strangely there is no provision for export under claim of rebate; may be it is not required, home consumption takes care of it.) The inputs received by him may not be usable as such or may require some further processing or after he has done some processing with the inputs, some further processing is required for which he does not have fecilities. To overcome this situation, the inputs are allowed to be cleared as such or after some processing, for test, repairs, refining or any further operation.

3.    Thus inputs on which credit has been taken can be utilised in three ways:-

1. May be used in or in relation to the manufacture of the final products ( that is the primary purpose for which inputs are procured) Rule 57F(1)
   
2. May be removed for home consumption or for export under bond . Rule 57F(2)
   
3. May be removed as such or after partial processing for further processing etc. Rule 57F(4).
   

 

Rule 56 B

 

4.    Under Rule 56 B, excisable goods which are in the nature of semi finished goods can be allowed to be removed without payment of duty, for carrying out certain manufacturing processes or excisable goods can be permitted to be cleared without payment of duty for carrying out tests. This provision enables the movement of semi finished goods for further manufacturing process. This raises certain basic questions like 1. What are semi finished goods?, 2. Can a fully manufactured product be called semi finished if some other new product can be got out of it?, 3. What is the manufacturing process that is to be carried out? and 4. Should a new product emerge?. Well these are questions not very relevant to this article.

5.    Now we have two situations where goods are sent out of a factory without payment of duty for carrying out some processing and in most general cases these processed goods are brought back to the factory for ultimate sale with or with out any further processing.]

1. Inputs or partially processed inputs are sent for processing.
   
2. Semi finished goods are sent for processing.
   

 

6.    Obviously these goods are to be sent to a processor, who in the process of processing the inputs or semi finished goods may himself become the manufacturer of excisable goods and may be liable to pay duty on the goods processed by him.Let us analyse this with an example.

A à Manufacturer availing modvat on several inputs. He sends his inputs for
processing.

B1 à is a manufacturer of excisable goods, paying duty and he also undertakes to
process A's inputs

B2 à is a mechanic who undertakes to process A's inputs

 

For the sake of simplicity, 56B cases are not covered in the example.

7.    Now A is allowed to clear his inputs, without payment of duty (forget the debits under 57F6) for further processing either to B1 or B2. Now suppose when these goods are processed by B1 or B2, a new excisable and dutiable product emerges. Should B1 or B2 pay the duty? A can clear the inputs under the cover of a 57 F(4) challan and get the goods back. But if the processed goods are dutiable, who pays the duty?. It is this question that

Notification No.214/86

answers.

 

8.    Under this notification specified goods
manufactured in a factory as a job work are exempted from payment of duty subject to certain conditions like the goods are used in relation to the manufacture of final products on which duty is leviable in whole or in part and certain prescribed procedures like supplier of inputs undertaking to discharge the duty liability, using of challans etc.

Now this job worker under 214/86 has been a controversial fellow right from birth. There is a myth that job work is not manufacture and job worker is not liable to pay duty as he is not the owner of the goods and if at all there is manufacture, the liability is on the principal, not the job worker. And some people who agree that the job worker is a manufacturer dispute his price. They believe that what he gets is only a fee for his labour and if at all he has to pay duty, it should be on this job charges. Let us take the case of a manufacturer of drums on job work. He gets steel from his principal free of cost and for each drum he makes he is given a job fee of Rs. 50/-. Suppose the cost of each drum would work out to Rs 1500/- and the rate of duty on drums is 10%. Now if at all he is forced to pay duty, he would like to pay duty only on Rs.50/- and not Rs.1500/- as the duty would be three times his job charges. All these disputes have been settled and today any one with a little knowledge of Central Excise law will agree that job worker is a manufacturer and he is liable to pay duty on the full value of goods cleared by him. 214/86 is an exemption to such a manufacturer, if he manufactures specified goods used for further manufacture of dutiable goods(normally) by the supplier of raw materials to the job worker. (of course the job worked goods can also be cleared without further processing.) 214/86 presupposes that the job worker is a manufacturer under Central Excise, liable to pay duty and that duty is exempted under certain conditions, mostly to inputs which were sent to him under 57F(4) or 56B, for processing. And that completes the cycle.

1. So A can send his inputs without payment of duty to B1 for processing and after processing, if the processed goods are new dutiable excisable goods, B1 can send them back to A without payment of duty under notification 214/86.
   
2. If this exemption was not there what would have happened was A can send his goods for processing but can not get them back without payment of duty as B1 would be liable to pay duty. To avoid this, A would clear his inputs on payment of duty and B1 would take credit of this duty. Again he would clear the processed goods on payment of duty (by utilising the credit earned) and then A would again take and credit and pay duty when the final products are cleared. This will result in multiplicity of accounts without any gain to revenue. It may be appreciated that the inputs and final products specified under 214/86 are the same ones as the inputs and final products specified for the modvat scheme. So perhaps the main idea behind this notification is to avoid the cascading effect of too many credits without any real gain or loss to any body.
   
3. So it is clear that both 57F(4) and 56B need 214/86 and to that extend they are all related. Goods can be sent under 57F(4) and 56B, but to get them back you need 214/86.
   
4. The learned author in his article propounded a theory that 214/86 authorises the manufacturer to send his inputs, partially processed inputs or semi finished goods for job work without payment of duty. I am afraid 214/86 even remotely does not suggest this. It has to be understood that 214/86 is all about sending job worked goods back to the supplier and not about sending inputs for job work.
   

 

EXCISE LAW TIMES – 01.09. 1999 – A 57