Friday, December 31, 2010

Service Tax on job work on exempt excisable goods - More Views

Mr. Sumit Batra, Advocate had raised a query : A is manufacturer of goods which are exempt from payment of excise duty. A gets some work done from B on job work basis. Is A liable to pay service tax for job work from B, in case B does not pay to the govt.?


   Responses were received from following eminent experts : 


Mr. B.N.Gururaj, Advocate & Author of Books on IDT :   "Some work" was got done by A through B. Does it result in bringing into existence excisable goods, as defined in section 2(d) of the CE Act, 1944? If the answer is affirmative, the said 'some work' will hop out of "Business Auxiliary Service" entry. There will be no service tax liability. On the other hand, if the result of processing is not bringing into existence any excisable goods, service tax would be chargeable by B.


Excisable goods are defined in section 2(d) as goods specified in the First Schedule or Second Schedule of the CE Tariff Act, 1985, as leviable to duty of excise. Thus, even if the goods are exempt, if the subject goods resulting from the work done finds entry in the CET, it would satisfy the condition of  exclusion clause in BAS definition. In effect no service tax would be payable.


If the excisable goods emerge in the hands of B, the fact that the final product is exempt in the hands of A is not relevant. On the other hand, if excisable goods do not emerge in the hands of B, and A's final product is exempt, service tax would be payable on the job charges billed by B on A.

It is incorrect when most people refer to the word "manufacture" when BAS has been amended to refer to "Excisable Goods". Reference has to be to bringing into existence any 'excisable goods'. Exemption to final product has nothing to do with service tax liability. On the other hand, if the process falls within the scope of BAS, such provided for eventual use of processed goods in the manufacture of exempt final product would require payment of service tax. Proviso to Notification No. 8/2005-ST may be referred.


Mr. T R Rustagi, former Chief Commissioner in CBEC : It seems to me that in the context of job work, the relevant taxable service is business auxiliary service. It seems that no service tax is attracted if the job work amounts to 'manufacture'. Even if the goods are exempt, 'manufacture' does take place in the process of job work.

V S Datey,  Author of books on Indirect Taxes and Corporate Laws :  A is not liable since liability of service tax is of service provider and not service receiver (except in case of reverse charge in case of GTA and import of service)


Even liability of B is arguable since the words used are 'payable' and not 'actually paid'. Thus, it can be argued that it is sufficient if the products are such that they are dutiable (Of course litigation prone)

CA Ravi Holani  : It is not specified whether the process or operations carried out is amounting to manufacture in terms of the Central Excise Act,1944 which is the acid-test, whether excise duty is payable or exempted has no relevance. 

CA Pradeep Jain :  Since he is exempt from payment of excise duty (must by virtue of exemption notification) which implies that the process undertaken by job worker will be amounting to "manufacture". If this is the situation then  the service tax is not payable under "BAS".


For queries of jobwork, first of all we must see whether the process amounts to manufacture under Central excise duty. There are two view on the same. One is judicial view wherein a new product with a different name, character and use should emerge. Secondly, we should see the deemed definition in chapter notes and should also see if the product is covered under MRP based valuation under Section 4A.


Further, if the process does not amount to manufacture, we have to see whether the job worker getting job work challan under Rule 4(5)(a) of Cenvat credit rules or under notification 214/86-C.E. dated 1.3.1986. This implies that the manufacturer must be paying duty after job work. In that situation the exemption under notification 8/2005-St is available.


If the same is not the situation, then jobworker has to pay service tax. However, the benefit of threshold exemption under notification 6/2005-ST is still available to him.


Here also, the job work in textile industry is exempt from service tax.


Mr. Madhukar Hiregange :  If the process carried on by the JW amounts to manufacture then no service tax otherwise it could be liable unless exempted under not.14/05. Exemption under Not.8/05 not available.


Mr. Gokul Kishore, Associate Editor of Service Tax Review : It depends on whether the job work undertaken by B amounts to manufacture as per Section 2(f) of Central Excise Act, 1944 or not. If the job work activity amounts to mfr, then Service tax liability does not arise as BAS as per Sec. 65(19) of FA, 1994 excludes it.


If it does not, then B as job worker is liable and may be eligible for exemption under Notfn No. 8/2005-S.T. subject to satisfaction of conditions therein. But this exemption in this case may not be admissible as the condition of removal of goods by principal on payment of duty is not fulfilled.


There is no question of A or somebody else paying the tax on behalf of some other person which is liable to be paid by B for the taxable service, if any, provided by him. Liability does not get shifted due to default by person liable as per law.


Mr. Pankaj Jain , Senior IDT Officer : The service appears to be covered in BAS (production / processing on behalf of client) and not covered in notification 8/2005.


Whether query has any complex ingredient ?


Nitesh Jain : Only B is responsible for ST - one cannot shift ones tax liability to another so no way A can be held responsible for a liability which belongs to B.


A.K.Parthasarathy, Tax Consultant :  Taxable service rendered by Mr.B attracts levy of service tax under the section 65 (105) :  "taxable service" means any service provided or to be provided -(zzb) to a client, by  any person in relation to business auxiliary service.

However, if goods manufactured by Mr. A attracts "NIL" rate of excise duty then, Mr. B has to pay the service tax subject to minimum exemption limit of Rs. 10 Lakhs.

Manish Wadhwa, IDT Officer :  Leviability of service tax on job work in respect of goods which are exempted from excise duty is a very complicated and controversial topic and an opinion cannot be given offhand without knowing the nature of the jobwork being undertaken and the complete aspects of the transaction. However briefly the activity is leviable to service tax under clause (v) of the Business Auxiliary Services- Production or processing of goods for, or on behalf, of the client. This is subject to the condition that the activity of production or processing does not amount to manufacture (of excisable goods) within the meaning of clause 2(f) of the central excise act 1944.

However prima facie in the case under reference since the manufacturer A is manufacturing excisable goods which are exempted by some notification, it would appear that the activity would not be covered under service tax.

Further discussion invited. Mr. Sumit Batra has been requested to clarify the grey areas.

Kind regards,

Rebecca Andrews