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Jobwork of SSI units by non-SSI units - A case of undue excise exemption

MAY 06, 2009

By S B Parikh

THE concept of sending the goods outside the factory for job work is not new. For treating certain activities as ‘job work', the conditions are that the ownership of goods should not be with the job worker; the Supplier of goods should send all raw materials or semi-finished goods to the job worker, who contributes his machinery, tools and labour for processing of materials supplied by the Supplier; and after processing the goods should be returned to the Supplier. The process carried out by job worker may amounts to ‘manufacturer' or not. If the process of job worker does not amount to ‘manufacturer', he may be liable to pay Service Tax under the category of ‘Business Auxiliary Service', which covers the activities of “Production or processing of goods for, or on behalf of client” as defined at Section 65(19) of the Finance Act, 1994. However, exemption from Service Tax is available under Notification No. 8/2005-ST dated 1.3.2005 on the condition that the appropriate duty of excise (other than Nil rate or wholly exempt) is payable on such goods. In other words, the value addition made by job worker either suffers Service Tax or Central Excise duty, as the case may be. This is the situation for the activities of job worker not amounting to ‘manufacture'.

2. If the activity of Job worker amounts to ‘manufacture', as defined at Section 2(f) of the Central Excise Act, 1944, such activity attracts levy of Central Excise duty and not Service Tax. Manufacturing activity on job work basis may be carried out either on payment of duty or by availing exemption from duty, if the provisions and conditions of relevant exemption notification are fulfilled. The relevant Notifications are Notification Nos. 83/94-CE, 84/94-CE and 214/86-CE.

i) Notification No. 83/94-CE dated 11.4.94 grants full exemption to specified goods manufactured by job worker. One of the conditions is that the specified goods received from the job worker shall be used in the factory of Supplier in or in relation to the manufacture of specified goods, which are exempted from whole of the duty of excise under Notification No. 8/2003-CE. In other words, Supplier of raw materials or semi finished goods should be availing SSI exemption.

ii) Notification No. 84/94-CE dated 11.4.94 grants full exemption to clearance of specified goods from the factory of SSI Supplier of raw materials or semi finished goods. One of the conditions is that the specified goods on return shall be used in the factory of the said Supplier in or in relation to the manufacture of specified goods, which are exempted under the Notification No. 8/2003-CE.

iii) Notification No. 214/86-CE dated 25.3.86 grants full exemption to specified goods manufactured in a factory as a job work and used in relation to the manufacture of specified final products OR cleared as such from the factory of the Supplier, who may be Non-SSI. One of the conditions is that excise duty is leviable (the word should be “payable” instead of “leviable”) on final product in whole or in part. However, specified clearances without payment of duty such as clearance for export under bond, clearance to EOU, etc. are also allowed.

3. Some persons are under impression that job work activities may be referred to as only minor processes carried out on the goods supplied by the Supplier. But, it is not exactly so. As per the definition of the term “job work” given under Rule 2(n) of the Cenvat Credit Rules, 2004 and as per the text of the aforesaid Notifications, major processes resulting into manufacture or finishing of an article can also be carried out on job work basis. It is possible that Non-SSI units undertake job work activities of SSI units and clear the goods manufactured by them on job work basis without payment of duty by availing exemption under Notification No. 83/94-CE. The conditions are: (i) the goods should be eligible for SSI exemption (ii) the goods manufactured on job work basis should be further used by the SSI unit in or in relation to manufacture of specified goods and (iii) the clearance value of such finally manufactured goods should be counted in the exemption limit of SSI units.

4. It is noticed that some SSI Units are having little facility for manufacture of goods. But, they are getting the goods manufactured on job work basis from Non-SSI units by availing exemption under Notification No.83/94-CE and 84/94-CE. After receipt of the goods from Non-SSI Job worker, the SSI unit undertakes only minor processes like Grinding, Mixing, Testing, Stitching, Packing, Labeling, etc. (which amounts to “manufacture”) and clear the same by availing SSI exemption. In such situation the substantial process (which also amounts to “manufacture”) is carried out by job worker and the value addition by the job worker is quite high. Though, such Non SSI job workers are availing full exemption from Central Excise duty. It is accepted position that SSI manufacturers should get full exemption from duty up to specified exemption limit. But, it is felt that such exemption should be made available only for the manufacturing activities undertaken by self.

5. Many Non-SSI manufacturers have set up SSI units in different names and under different ownership. It is almost impossible to legally club the clearance of such units by treating them one and same. Such SSI units can be easily established in small premises and with few low valued machines. For the buyers who do not avail Cenvat Credit, goods are being supplied from such SSI units without payment of duty under Notification No. 8/2003-CE. As such SSI units are not having all facility to manufacture such goods, they got the goods manufactured on job work basis from Non-SSI units, who are also entitled for exemption by this route. For example SSI unit purchase Chemicals and send them for conversion into Dyes or Dyes Intermediates [which requires high valued machinery] to Non-SSI unit on job work basis. After receipt of Dyes/Intermediates, the SSI Unit undertakes one or more minor processes like crushing, mixing, diluting, testing, packing, labeling, etc. with Grinder, Mixer, Stirrer, etc. [by low valued machinery] and clears the final products (Dyes) without payment of duty. In such situations, the processes carried out by both units (SSI and Non-SSI) amount to manufacture and attract Central Excise duty. But, the Non-SSI unit (job worker) is getting undue exemption of Notification No.83/94-CE, which is not otherwise available to him. If the intention is to give exemption to Non-SSI units doing job work of SSI units, exemption from Service Tax should also be given, when process not amounts to manufacture.

6. For more clarity, let us see the following example:

 

Value of Raw Materials

Job charges of J (Non-SSI job worker)

Assessable value of the goods at Job worker's premises

Value addition by respective SSI units

Assessable value of goods on clearance by SSI Units

Supplier of Raw Material: S1 (SSI).

Job Worker: J (Non SSI)

Rs.100 lakh

Rs.40 lakh

Rs.140 lakh

Rs.10 lakh

Rs.150 lakh

Supplier of Raw Material: S2 (SSI).

Job Worker: J (Non SSI)

Rs.100 lakh

Rs.40 lakh

Rs.140 lakh

Rs.10 lakh

Rs.150 lakh

Supplier of Raw Material: S3 (SSI).

Job Worker: J (Non SSI)

Rs.100 lakh

Rs.40 lakh

Rs.140 lakh

Rs.10 lakh

Rs.150 lakh

TOTAL

Rs.300 lakh

Rs.120 lakh

Rs.420 lakh

Rs.30 lakh

Rs.450 lakh

Tax liability:

On Job worker

On Supplier of raw materials

If Job worker's activity does not amount to ‘manufacture':

Service tax is payable by Job worker on Job charges.

No tax / duty is payable by supplier of raw materials.

If Job worker's activity amounts to ‘manufacture':

No excise duty is payable as full exemption is available under Notification No.83/94-CE.

No excise duty is payable by supplier of raw materials under Notification No. 8/2003-CE.

From the above example, it can be seen that the goods worth Rs.420 lakh manufactured by a single Non-SSI manufacturer get full exemption from central excise duty, if manufactured on job work basis for different SSI units. However, if the process carried out by job worker does not amount to ‘manufacture', the job worker is required to pay service tax on job charges of Rs.120 lakh and no Cenvat credit of the same is admissible to supplier of raw material, who is availing SSI exemption under Notification No. 8/2003-CE.

7. In early period, for the goods manufactured on job work basis falling under Tariff Item No.68, only partial exemption from central excise duty to was available under Notification No. 119/75-CE dated 30.4.1975, which has been rescinded by Notification No. 58/81-CE dated 1.3.1981. The said Notification was granting exemption of duty only in excess of duty calculated on the basis of amount charged for job work. In other words, duty was payable on job charges.

8. It is felt that if ‘manufacturing' activity is undertaken by large units on job work basis, it should be charged to excise duty at least on the value addition made by such unit (Naturally, Cenvat credit would not be available for the goods supplied by unit availing SSI exemption). It is humbly suggested that instead of granting fully exemption under Notification No. 83/94-CE to all job workers, Non-SSI job workers should be granted exemption from duty only in excess of duty payable on the amount equal to the value of job charges (similar to provisions of erstwhile Notification No. 119/75-CE dated 30.4.75). Then, in the example given above, the Non-SSI job workers would require to pay central excise duty on Rs.120 lakh, which will put them on parity with other job workers who are paying service tax on job charges .

9. Alternatively, SSI Units, who want to avail Cenvat Credit facility, have an option for getting the goods manufactured on job work basis on payment of duty. By adopting this route, the Supplier of raw materials and the Job worker, both are entitled to avail benefit of the Cenvat Credit scheme.

[The views expressed by the author are his personal views.]

 

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