FEBRUARY 04, 2016

By Labli A. Nahar, Chaitanya R. Bhatt and Nirav S. Karia

INDUSTRIES engaged in manufacture of final products follow a practice of engaging contractors for carrying out processes such as cutting, welding, spray-painting, heat-treatment, fabrication, etc. Quite a few times, in terms of the agreements between the manufacturer and the contractors, the contractors send their personnel to the factory premises of the manufacturer (who may sometimes only act as 'raw material supplier') to carry out the aforesaid activities.

The question that arises for consideration is as to whether the activities carried out by the contractors for the manufacturer, amounts to independent job-work activity (which in many cases amounts to "manufacture" under Section 2(f) of the Central Excise Act, 1944 on which excise duty is leviable under Section 3 of the said Act) or the same amounts to 'supply of manpower service' which is leviable to service tax in terms of Rule 2(1)(d) of the Service Tax Rules, 1994 read with Notification no. 30/2012-ST dated 20.06.2012.

In this regard, it is pertinent to refer to the legal provisions as under.

In terms of Section 66D(f) of the Finance Act, 1994, "services by way of carrying out any process amounting to manufacture or production of goods excluding alcohol ic liquor for human consumption" is exempt from service tax. Further, Section 65B(40) of the Finance Act, 1944 which defines "process amounting to manufacture or production of goods" inter alia covers under its purview a process on which duties of excise are leviable under section 3 of the Central Excise Act, 1944.

The Central Excise duty is to be recovered from the person who is the 'manufacturer'.  The term 'manufacturer' includes not only the person whose act causes the activity of manufacture but also a person who employs hired labour in the manufacture of excisable goods.  In other words, a person who is undertaking the physical activity of manufacture is no doubt a manufacturer.  The definition also includes a person, even though not engaged in the physical act of manufacturing, who employs hired labour in the production or manufacture of excisable goods.

As regards supply of manpower services, Rule 2(g) of the Service Tax Rules, 1994 states that, "supply of manpower" means supply of manpower, temporarily or otherwise, to another person to work under his superintendence or control.

Further, the recent Circular no. 190/9/2015-Service Tax dated 15.12.2015 issued by CBEC for apparel exporters in relation to fabrication of garments also clarified as under:

"2. The nature of manpower supply service is quite distinct from the service of job work. The essential characteristics of manpower supply service are that the supplier provides manpower which is at the disposal and temporarily under effective control of the service recipient during the period of contract. Service provider's accountability is only to the extent and quality of manpower. Deployment of manpower normally rests with the service recipient. The value of service has a direct correlation to manpower deployed, i.e., manpower deployed multiplied by the rate. In other words, manpower supplier will charge for supply of manpower even if manpower remains idle.

2.1 On the other hand, the essential characteristics of job work service are that service provider is assigned a job e.g. fabrication/stitching, labeling etc. of garments in case of apparel. Service provider is accountable for the job he undertakes. It is for the service provider to decide how he deploys and uses his manpower. Service recipient is concerned only as regard the job work. In other words service receiver is not concerned about the manpower. The value of service is function of quantum of job work undertaken, i.e. number of pieces fabricated etc. It is immaterial as to whether the job worker undertakes job work in his premises or in the premises of service receiver."

From the above, it is clear that the essential characteristic of manpower supply services is that the service provider should supply labour to another person to work under the latter's supervision and control. In other words, the service provider would have no control over the labour supplied to the service recipient.

However, if a person is carrying out a specific activity (say, mere processing activity) for another person and not merely supplying labour to work under the latter's supervision and control, the same would not amount to manpower supply services but would amount to independent job-work activity.

Now, let us consider the following scenario:

"A contractor, say A, supplies personnel to the factory premises of a manufacturer say B for carrying out activities say welding, cutting and fabrication of final products manufactured by B.

Further, in terms of the agreement between A and B, the contractor personnel work under the control and supervision of A only.

The activity of welding, cutting and fabrication carried out by A amounts to 'manufacture' under Section 2(f) of the Central Excise Act, 1944 under the natural meaning of the term 'manufacture'.

Further, pursuant to the activity carried out by the personnel of A, no further activity is done by B on the final products and the said final products are cleared from the factory premises of B on payment of applicable excise duty under Section 3 of the Central Excise Act, 1944."

In the above scenario, one could contend that even though the personnel are supplied by A to work in the factory premises of B, the activity carried out by A is in the nature of process amounting to manufacture and not manpower supply services due to the following reasons:

+ The personnel are under the control and supervision of A;

+ The activity carried out by personnel of A amounts to manufacture under Section 2(f) of the Central Excise Act, 1944;

+ The final products are cleared from the factory on payment of applicable excise duty under Section 3 of the Central Excise Act, 1944;

However, the question arises that if the entire manufacturing activity is carried out by personnel of A and B is the person who pays the excise duty on the activity carried out by personnel of A, then would the exemption under Section 66D(f) be still available?

In such a scenario, it can be contended that even though the excise duty on clearance of final products is paid by B, Section 65B(40) of the Finance Act, 1944 only contemplates that the activity should be subject to excise duty under Section 3 of the Central Excise Act, 1944. Therefore, the fact as to who pays the excise duty is irrelevant.

Alternatively, it could also be contended that the activity carried out by the contractors would amount to intermediate production process and be exempt under Sr. No. 30(c) of Mega Exemption Notification No. 25/2012-ST.

Sr. No. 30(c) of Mega Exemption Notification No. 25/2012-ST dated 20.06.2012 reads as under:

"30. Carrying out an intermediate production process as job work in relation to -

(c) any goods excluding alcoholic liquors for human consumption on which appropriate duty is payable by the principal manufacturer;"

However, going further, what would be the situation if, in the above illustration, the agreement between the parties only provided that A would carry out the activity of welding, cutting and fabrication for B(which amounted to manufacture under Section 2(f) of the Central Excise Act, 1944); however, the personnel of A worked under the control and supervision of B?

In the above scenario, could it be said that the activity carried out by personnel of A which amounts to 'manufacture' under the Central Excise Act, 1944 on which excise duty is leviable under Section 3 of the said Act will still amount to "supply of manpower services" because the personnel of A worked under the control and supervision of B?

In other words, what would be the line of demarcation where the activity jointly involves both supply of manpower service as well as process amounting to manufacture under the Central Excise Act, 1944?

The above scenario would certainly be a subject matter of dispute between the assessee and the department.

Going by the nature and intent of the aforesaid Circular dated 15.12.2015, it is clear that the terms of the contracts/agreements entered into between the parties would have to be made absolutely transparent and crystal clear in order to determine the taxability of the transaction. In other words, there should no ambiguity in the language of the contract/agreement entered into between the parties for carrying out the activity which per se may amount to manufacture under one's hand i.e. either A or B in the illustration discussed supra.

In light of the above discussions, it is hoped that the ambiguity as to whether the activity of job work amounts to supply of manpower service or a process amounting to manufacture will come to an end by way of a suitable clarification issued by the CBEC or by way of upcoming amendments in the Union Budget 2016.

(The Authors are Chartered Accountants and associated with M/s. Lakshmikumaran & Sridharan, Mumbai and the views expressed are strictly personal.)