Captive Consumption and Job Work under Central Excise Act
Excise duty is collected on goods manufactured or produced in India. The taxable event for levy of excise is the ‘manufacture or production’ in India. This means that the duty is payable as soon as goods are manufactured within the factory. In manufacturing of a good, various stages are involved. It may happen that at some stages of manufacturing/production different products are formed. These products formed at different stages of production of final product are called intermediate products. Since the taxable event is manufacturing, these intermediate goods are also liable to excise duty (provided it fulfills the condition of marketability).
The concept of captive consumption deals with consumption of intermediate goods within the factory of production. The concept of job work deals with sub-contracting of a particular process to a job worker. This process may or may not amount to manufacturing.
This article deals with the concept of captive consumption and job work in the light of liability to pay excise duty. The correlation between the two concepts has also been sought to be established.
Concept of Captive Consumption
Captive Consumption means the consumption of goods manufactured by one division and consumed by another division(s) of the same organization or related undertaking for manufacturing another product(s).
Liability of excise duty arises as soon as the goods covered under excise duty are manufactured but excise duty is collected at the time of removal or clearance from the place of manufacture even if such removal does not amount to sale. The duty is determined on the date of removal of goods from place of manufacture. Incase where the excisable goods are used within the factory, the date on which the goods are issued for use in factory is considered as the date of removal of such goods (Explanation to Rule 5). Thus, duty will be determined on the date when these goods are put to captive consumption.
Paying duty on all captive consumption is highly inconvenient to manufacturers and hence exemptions have been given in many cases. There are various notifications exempting duty on captive consumption; however, we shall deal with only an important notification exemption notification to understand the concept and to establish its relationship with job work.
Notification No. 67/1995 CE dated 16.3.1995 exempts:
(a) capital goods as defined in CENVAT Credit Rules, 2002 manufactured in a factory and used within factory of production;
(b) all goods falling under First Schedule to Central Excise Tariff Act (CETA) manufactured in a factory and used within the factory of production in or in relation to manufacture of final products specified in First Schedule to CETA.
from all the duties of excise leviable thereon.
Thus, from the above, to qualify for the above said exemption notification, the following conditions need to be satisfied:
- They must satisfy the definition under CENVAT Credit Rules
- They must be manufactured within the factory.
- They must be used within the factory of production.
All other Goods:
- They must be falling under First Schedule to CETA.
- They must be manufactured within the factory.
- They must be used within the factory of production in or in relation to the manufacture of final products specified in First Schedule to CETA.
Thus, an essential pre-condition for availing exemption under this notification is that the goods should be manufactured in a factory and used within factory of production i.e. they should be captively consumed. Another essential condition is that the final products should be neither exempted from the payment of Excise duties nor chargeable to nil rate of duty save some specified clearances. Where the final products are exempted from duty of excise, the intermediate goods will be liable to duties of excise.
Captive Consumption under CENVAT– Captive consumption finds reference only in the definition of capital goods and definition of inputs. These definitions provide a necessary condition that the items mentioned therein have to be used in the factory of production i.e. captively consumed, to be termed as capital good/input under CENVAT Credit Rules.
Concept of Job Work
It is not possible for manufacturers to carry out all processes in their own premises. The processes which pose problems or which are not cost effective at his end can be sub-contracted or delegated to another manufacturer or processor. Many a time, the sub-contractor may be more efficient both in terms of the quality and cost as compared to the main manufacturer due to pursuance of core competencies. Most of the big manufacturers make very good use of this concept and assign processes to more than one vendor which enables them to cut down on manufacturing costs. This sub-contractor is referred to as ‘job worker’ and the concept is called ‘job work’ or ‘sub-contracting’.
Illustration– A car manufacturer sub-contracts with a small-scale unit which specializes in painting, to paint the cars manufactured by it. The car manufacturer (customer) provides unpainted cars to sub-contractor (job worker) who returns the car back to the customer after painting. The car manufacturer here is getting the work done on job work basis through the job worker.
Definition- In the context of the Central Excise law, job work has been defined under Rule 2(n) of the Cenvat Credit Rules, 2004 to mean processing or working upon of raw material or semi-finished goods supplied to the job worker, so as to complete a part or whole of the process resulting in the manufacture or finishing of an article or any operation which is essential for aforesaid process.
The work sub-contracted to job worker can be done within the factory premises or even outside the factory. Where the job work has to be done outside the factory, as per Rule 16A, the raw material or partially processed goods can be removed after fulfilling conditions specified by the Commissioner of Central Excise.
It is vital to note here that the process undertaken by the job worker on the goods that are supplied to him for job work may or may not amount to manufacture. If one were to go by the definition of the term “job work”, it is evident that the raw materials have to be supplied by another person. In Prestige Engineering India Ltd v CCE Meerut the Supreme Court held that when the job worker contributed his own material to the goods supplied by the customer and engaged in manufacturing, the activity was not one of job work. However, minor additions by the job worker would not take away the fact that the activity was one of job work.
Job Work and Manufacturing- Since excise duty is on ‘manufacture’, duty liability arises only when the goods are manufactured during job work. Where the goods are manufactured during job work, the job worker would be liable to pay excise duty on the goods so manufactured unless the principal manufacturer who has supplied him the goods for job work, furnishes a declaration under Notification 214/86 dated 25.03.1986 which exempts goods manufactured by a job worker from excise duty provided the said goods after job work are returned to the principal or cleared for export or cleared for home consumption on payment of duty of excise. Where the goods are returned to the principal, the principal should either clear it on payment of duty or use it in his manufacturing process which should result in a dutiable product being manufactured. The declaration as stated above should be given to the Assistant Commissioner of Central Excise who has jurisdiction over the factory of the job worker.
Where this notification does not apply, Rule 16B applies. Under the rule, excisable goods in the nature of semi finished goods can be removed for carrying out certain manufacturing processes with the permission of Commissioner of Central Excise. The Commissioner may allow these goods to be brought to the parent factory, without payment of excise duty or may allow it to be directly cleared from the place, to which the goods have been removed, on payment of excise duty.
Job Work- Levy of Central Excise or Service Tax: Where the processing undertaken by the job worker does not amount to manufacture, the said job worker could be liable to service tax under the heading ‘Business Auxiliary Service’ as per which, the activity of production or processing of goods for, or on behalf of the client would be taxable. The liability in terms of job work can arise where the processing is done for the client. However, where the processing amounts to manufacture, the same would not be taxable under service tax and the liability if any would have to be studied under Central Excise. Even if the processing comes under Business Auxiliary Service, the job worker would be entitled to exemption from service tax under notification 8/2005 ST where the goods after processing are returned to the principal for use in or in relation to manufacture of dutiable goods which are cleared on payment of duty of excise. Where the goods to be cleared by the principal are exempted goods or goods which are chargeable to nil rate of duty, the exemption to the job worker u/n 8/2005 ST would not be available and he would be liable to service tax.
Job Work under CENVAT- Cenvat credit can be availed on materials sent for job work as per rule 4(5)(a) of the Cenvat Credit Rules, 2004. Rule 4 (5) (b) requires that the goods sent to the job worker have to be brought back by the manufacturer within 180 days of being sent to the job worker. It has to be established from the records, challans or memos or any other document produced by the manufacturer taking the Cenvat credit that the goods have been received back in the factory within one hundred and eighty days of goods being sent to the job worker.
The Cenvat credit shall also be allowed in respect of jigs, fixtures, moulds and dies sent by a manufacturer of final products to a job worker for the production of goods on his behalf and according to his specifications. The restriction with regard to the requirement of receiving the goods back within 180 days from the date of sending would not apply to such tools, dies, fixtures and moulds.
Job Work in Captive Consumption
In big factories, the goods are given as subcontract to various job workers. Such job workers fabricate and supply these goods within the factory itself. In such cases, whether the benefit of the exemption under Notification 67/95 can be denied on the ground that the subject goods have been manufactured by some other person and not by the assessee himself.
In this connection, it is pertinent to note that, there is no requirement whatsoever in the said notification as to who shall manufacture such goods. A careful reading of the above said notification reveals that, what is intended in the notification is that the subject goods shall be manufactured in the factory of production for the manufacture of final products. In other words, the facts like, who has manufactured such goods or on whose behalf, etc are not at all relevant to claim the benefit of the said exemption. As such, the above said exemption shall be available for the goods manufactured by job worker too, if they are manufactured within the factory premises and used within the same premises in or in relation to the manufacture on final products which are chargeable to duty of Excise.
In Thermax Surface Coating Limited v. CCE it has been held that the paint shop constructed by the appellant at the site of another company, are entitled to the benefit of Notification 67/95. The decision of the Hon’ble Tribunal in the case of Triveni Engineering Industries Limited v. CCE, has been relied upon in this regard, wherein, the Hon’ble Tribunal has held that there is no requirement under the said Notification that the goods must be used by the same manufacturer in his factory of production. Similar view has been held in Tambraparani Containers v. CCE.
The decision of the Hon’ble Tribunal in the case of Elcon Clipsal India Limited v. CCE is also relevant. In this case, the benefit of exemption under Notification 67/95 has been extended for the goods manufactured and utilized by the appellant in his factory of production, notwithstanding the fact that the appellant had billed his customer for such goods. While coming to the decision, the Hon’ble Tribunal has laid emphasis only on the fact of utilization of the subject goods, in the factory of production. Similar view was held in the case of Ashok Iron Works Limited v. CCE also.
From the forgoing chapters, it can be concluded that the benefit of notification 67/95 is available for all the goods specified in Column (1) of the table to the said notification, provided if they are manufactured within the factory and used within the factory for the manufacture of final products on which appropriate duty of excise is paid, irrespective of the fact, such goods are manufactured by the assessee themselves or by job workers. Thus, job work can be done even where the goods are consumed captively without losing out on the exemption given under the said notification.
However, it would be very difficult to relate the two concepts specifically under CENVAT Rules as captive consumption appears merely in definition of inputs and capital goods. The rule referring to the job work only requires the goods to be brought back by the manufacturer. It no where states that the goods brought back has to be used within the factory of production. Hence drawing any corollary with regard to these concepts under CENVAT Rules is not possible.