Scrap Generated out of Landed Cost of Raw material, No Value Added Once again: CESTAT [Read Order]

The Chennai bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT)has held that no value is added again when the scrap is generated out of the landed cost of raw material as it would lead to double taxation. Hariyana Metals Ltd, the appellant challenged the order of Commissioner of Central Excise (Appeals), Nagpur that, upon appeal at the behest of the jurisdictional Commissioner of Central Excise, set aside the demand dropped by the original authority to confirm recovery of ₹ 3,93,122 under section 11A of Central Excise Act, 1944, along with applicable interest under section 11AB of Central Excise Act, 1944, and imposition of penalty of like amount under section 11AC of Central Excise Act, 1944, is the correctness of including the value of ‘scrap’ arising from ‘job-work’ in the assessable value as additional consideration from the principal for undertaking such work

. The appellant undertakes ‘re-rolling’ of ‘mild steel billets and ingots’ supplied by M/s Larsen & Toubro Ltd, Pondicherry under an agreement that, inter alia, reassures quality in terms of the finished goods returned to the principal containing 90% of the supplied raw material. According to central excise authorities, the implication therein is that the residue of up to 10% of the material supplied is to be treated as concealed consideration to the extent of value realized upon ‘scrap’ being sold. It was observed that in cases where the job worker and the manufacturer are following the procedure under Rule 4(5)(a) of the Cenvat Credit Rules, 2004, the intermediate products at the hands of the job worker are not liable to duty, and hence the question of adding the value of scrap does not arise. Once it is settled, that the duty liability of the processed goods is to be discharged by the job worker and not by the Principal manufacturer, the decisions of the apex court in the case of General Engineering Works and Lloyds Steel Industries become handy and useful for determining the correct assessable value of the said goods.

The sale value of the scrap at the hands of the job worker was an additional consideration for doing the conversion job for the supplier of the raw material. Going by the definition of transaction value, the principal manufacturer needed to pay not only the job charges but also a value equal to the money value of the scrap to the job worker for purchasing the processed goods.

The job charges together with the value of scrap formed the conversion charge of the processed goods. Hence, it is logical to conclude that the conversion charge was depressed to the extent of the value of the scrap retained.’ in relation to clearances during 2009-10. It was contended that, on the admitted discharge of duty on ‘landed cost of raw materials and conversion charges’, there can be an assertion of duty liability on ‘scrap’ sold by them in the guise of resorting to a particular contingency in rule 6 of Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000.

Though the value adopted for discharge of duties in clearances effected by the assessee in re General Engineering Works is not incorporated A two-member bench of Mr C J Mathew, Member (Technical) and Mr Ajay Sharma, Member (Judicial) observed that “it is not in dispute that the landed cost of raw materials is not doubted and that the impugned ‘scrap’ has been generated from such raw material. That value, having been included once, is not required to be added once again for assessment to duty.” The CESTAT set aside the impugned order and allowed the appeal.

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