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(See 'Guest' Column) With inflation down RBI Governor explicitly hints at interest rate reduction Govt decides to let land Ordinance lapse; to amend Bill pending in Rajya Sabha Govt launches Sahaj, online release of new LPG connections Govt identifies 305 town for building houses for urban poor Cashless Payment: MoF seeks feedback from other Ministries on 30-Point suggestions to incentivise consumers FM says best mind from legal profession should join judiciary; legal education needs huge manpower Aviation Secretary reviews Action Plan to decongest Terminal 1D at IGIA (See 'Mixed Buzz') I-T - Whether lump sum addition is warranted when Assessee repeatedly failed to maintain books, despite a voluminous business: ITAT (See '2015-TIOL-1353') IRDA looking into proposal to digitalise all insurance policy documents CX - Ban on usage of plastic pouches in packing of gutkha - appellant closing factory but coming to know that ban is effective from 01.03.2011, hence reopening factory - It is Rule 16 that applies and not rule 10 - Refund permissible: CESTAT (See 'Breaking News') Army releases Amar Katha comics on war heroes to inspire youngsters (See 'Mixed Buzz') Black Money Act - Addl CITs/JCITs to perform functions of AOs (See 'What's New') ACC goes for mega Secretary-level reshuffle; Dr Hashmukh Adhia is new Revenue Secretary (See 'Mixed Buzz') Unveil Comprehensive Strategy to tackle Black Money (See 'TIOL Edit') I-T - Whether sum shown as provision for bad debts by bank which is not credited to accounts of debtors and thus written off can be allowed as deduction - NO: ITAT (See '2015-TIOL-1350') Govt needs to regulate Pet Shops, Dog and Aquarium Fish Breeding: Law Commission Report (See 'Breaking News') Compensation for Land Acquisition: Govt to issue Removal of Difficulties Order (See 'Mixed Buzz') ACC goes for major top level bureaucratic reshuffle: Shaktikanta Das promoted as Economic Affairs Secretary + Hasmukh Adhia is New Revenue Secretary + Sunil Arora is New I & B Ministry Secretary + Tapan Ray to be New Secretary, MCA For CBEC, TAR becomes Taxpayers' Services Directorate; DIPR becomes its subordinate office (See 'Circulars' in Excise) CBDT promotes two CCITs as Principal CCITs (See 'Promotion' in Pitara) NRI deposits raise India's external debt by 6.6% (See 'Mixed Buzz') India, Germany agree to amend DTAA; enhance exchange of information (See 'Mixed Buzz') Income Tax - Deduction - Excise Duty paid under protest - ITAT allows (See 'DDT' Column) Tax paid by mistake - Why bring Section 11B into picture? 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Service tax on job work : Still in a mess!

By Santosh Hatwar

BUSINESS Auxiliary service was in the news recently thanks to the ingenuity of certain field officers’ over enthusiasm in netting small time job workers in the Gems and jewellery sector into the service tax fold. This prompted the Board to issue a circular No. 341/13/2005 TRU dated 12.05.2005 on the subject of levy of service tax on certain processes under taken on job work basis in gems and jewellery sector. The changes brought in by the Finance Bill 2005 (now Finance Act 2005) in the definition of Business Auxiliary service was also mentioned and finally it was stated that those processes which are outsourced in gem and jewellery sector which amount to manufacture within the scope of Section 2(f) of the Central Excise Act, 1944 would not be liable for service tax. Production of goods on behalf of the client is leviable to service tax only if such production activity does not amount to manufacture. Is there anything new in the clarification? Does it clarify anything at all in the first place except for restating what is available in the statute? Let us delve into the provisions related to this levy that has been the subject of one controversy or the other since its inception.

The scope of Business auxiliary service for the purpose of levy of service tax was extended with effect from 10.09.2004 to include “production of goods on behalf of the client” by amending clause (19) of Section 65 of the Finance Act 1994. This clause was further amended by Section 88 of the finance bill 2005 by substituting the existing clause with a new clause viz., “production or processing of goods for, or on behalf of the client”. Further vide Notification No. 8/05 ST dated 01.03.05, “production on behalf of the client” is exempted from service tax if these job worked goods are produced from the raw materials or semi finished goods supplied by the client and these are returned back to their clients for use in or in relation to the manufacture of final products on which excise duty is payable. This concept of “production or processing of goods for, or on behalf of the client” is commonly referred to as job work in trade parlance.

As per the explanations to this Notification the production of goods undertaken should not amount to manufacture in terms of Section 2(f) of the Central Excise Act, 1944 and duty payable goods does not include goods which are wholly exempt from duty or nil duty goods. For the purpose of this Notification the words production and processing are used interchangeably though they do not mean the same. The Web definition of production in economics is manufacturing or mining or growing something (usually in large quantities) for sale; e.g., "he introduced more efficient methods of production”. Similarly processing is defined as preparing or putting through a prescribed procedure for e.g., "the processing of ore to obtain minerals". In Webster’s college dictionary production means, “ the act of producing; creating or manufacture” and processing means “ a systematic series of actions directed to some end”; “ a continuous action, operation, or series of changes taking place in a defined manner”.

If we look at these definitions in the backdrop of excise and service tax laws it is clear that production and manufacture mean one and the same and therefore can be used interchangeably which is normally the case. But when it comes to processing, it may or may not amount to production or manufacture depending on the nature of processes involved in the act. However, the explanation (i) to the Notification states that this production should not amount to manufacture thereby resolving to certain extent that production is not always manufacture in service tax. So far so good, but what is the fate of “processing”? The service tax levy is on “production or processing of goods for, or on behalf of the client” and the exemption is given only to “production on behalf of client”.

As is normally understood the activity of “production of goods on behalf of the client” is the practice followed in the pharmaceutical industry i.e., manufacture on loan licensee basis, jewellery industry, textiles and a host of other sectors of industry that are either process intensive or labour intensive. In all these cases normally the job worker is treated as manufacturer and excise dues are discharged by the job worker only. As the Notification speaks of exempting only production of goods on behalf of the client that in any case stands exempted by virtue of such activity being viewed as manufacture. In my opinion, as per the Notification, the exemption is applicable only when it is “production of goods on behalf of the client” as it does not speak of the “processing of goods for, or on behalf of the client” explicitly.

Alternatively, if the words production and processing are used interchangeably as it appears to suggest in their liberal usage in the Notification as well as the definition of the taxable service in the Act, then it ultimately boils down to the usage of these produced/processed goods by the client of the job worker (including those in the gems and jewellery sector). The client of the job worker should use these produced/processed goods in their manufacturing activity and the resultant final products should be cleared only on payment of duty. If the final products at the client’s end are cleared without payment of duty then this exemption is not applicable and the job worker has to discharge service tax. Fortunately small time job workers (including those in the gems and jewellery sector) can benefit from the value-based exemption introduced by Notification No. 6/05 ST dated 01.03.05 irrespective of the treatment meted to the term “processing”. Anyway the drafting of this Notification has put the job worker in any sector, including the gems and jewellery segment at the mercy of information furnished by the client. In any case this needs an immediate clarification or an amendment in the Notification to include “processing for, or on behalf of the client” to avoid unnecessary litigations in the field.

(The author is working with the Department and the views expressed are strictly personal)


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