Scrap Value Generated During Manufacturing Can’t Be Added To Assessable Value Of Finished Goods: CESTAT

The Bangalore Bench of Customs, Excise and Service Tax Appellant Tribunal (CESTAT) has held that scrap value generated during manufacturing cannot be added to the assessable value of finished goods. The bench of P.A. Augustian (Judicial Member) and R. Bhagya Devi (Technical Member) has observed that including the value of scrap again in the assessable value of the drums would be unjustified. It relied on earlier tribunal decisions holding that when scrap generated at the job worker’s premises is cleared on payment of duty, the value of such scrap cannot be added to the assessable value of the finished goods manufactured on job work. Industrial Engineering Corporation was engaged in manufacturing tin containers and bitumen drums on a job-work basis for Bharat Petroleum Corporation Ltd. (BPCL), Kochi Refinery. Under the contractual arrangement, BPCL supplied steel coils free of cost to the appellant’s factory, while the appellant undertook the fabrication of containers and drums and received fabrication and delivery charges in return. During departmental verification of records, it was noticed that scrap generated from the steel coils supplied by BPCL was not returned to the principal manufacturer. Instead, the appellant sold the scrap from its premises after paying applicable excise duty. The department alleged that the value of such scrap, along with delivery charges received from BPCL, constituted additional consideration flowing to the appellant and should therefore be included in the assessable value of the drums manufactured on job work. Based on this allegation, several show cause notices were issued covering the period from 2008-09 to 2015-16, proposing recovery of differential duty. The appellant contended that the valuation of the drums was determined based on costing carried out by BPCL itself and that the duty had already been discharged on that value. It was further argued that the scrap generated during the manufacturing process had been cleared separately on payment of duty at the time of its sale, and therefore there was no justification to again include the scrap value in the assessable value of the finished drums. With respect to delivery charges, the appellant submitted that the transportation cost from its factory to BPCL’s premises was borne by BPCL and merely routed through the appellant for payment to the transporter. It also pointed out that similar disputes raised earlier by the department had been dropped in adjudication proceedings, and those orders had not been reviewed by the department. The appellant further argued that the entire exercise was revenue-neutral because BPCL, being the recipient of the goods, would have been eligible to avail CENVAT credit on any duty paid by the appellant. The department argued that since the price was not the sole consideration in the transaction, the provisions of Section 4(1)(a) of the Central Excise Act were not applicable. They relied on Rule 5 of the Central Excise Valuation Rules, 2000, contending that the additional consideration in the form of scrap value and delivery charges should form part of the assessable value of the goods. The department also referred to Supreme Court rulings relating to valuation in job-work situations, asserting that the assessable value should reflect all elements connected to the transaction. After examining the records and hearing both sides, the tribunal noted that the appellant had already paid duty on the finished drums after taking into account the entire cost of the metal sheets supplied by BPCL. It also observed that the scrap generated during manufacturing had been cleared separately on payment of duty. Regarding delivery charges, the tribunal observed that the transportation charges paid by BPCL were clearly identifiable and related to the movement of goods from the factory to the buyer’s premises. Referring to the Supreme Court’s decision in Escorts JCB Ltd., the bench noted that transportation costs incurred for delivery beyond the factory gate are not includable in the assessable value of excisable goods. The tribunal concluded that the demands raised by the department on account of scrap value and delivery charges were unsustainable. Case Details Case Title: Industrial Engineering Corporation Versus Commissioner of Central Tax And Central Excise, Cochin Citation: JURISHOUR-224-CES-2026(BANG) Case No.: Excise Appeal No. 20354 of 2019 Date: 03.03.2026 Counsel For Appellant: P. Satheesan, Advocate Counsel For Respondent: M. A. Jithendra, Authorized Representative Click Here To Read Order Read More: Tea Blending, Packing Services Exempted From Service Tax As ‘Agricultural Produce’: CESTAT

Scrap Value Generated During Manufacturing Can’t Be Added To Assessable Value Of Finished Goods: CESTAT

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