You are on page 1of 9

Job work Charges – Taxability

At last we are here, GST has come into force, and India is being ripped apart by the
missing transitional provisions. The doubts in trade are being cleared by twitter handle
and Press Reports. All the awareness that is being shoved down the throat of people in
trade.

It is pretty much clear, as to how the job work model is going to be operated under GST.
Section 143 of Central Goods and Services Tax Act, 2017 and its replicators (‘GST Law’),
provides the model for job work. Goods to be sent under challan, job work activity be
done, then removed on payment of duty/ without payment of duty within 1/ 3 years. In
the present article, we shall deal with the aspect of Job work charges.

Central Excise Law/ Service Tax Law

The job work is a trade parlance for “some outsource activity”. This outsource activity
could be anything, be it mere painting of items, be pressing of sheet metal, be it mere
assembling. However, job work as trade parlance is different from job work defined
under the erstwhile Central Excise Law vide Notification No. 214/86-CE (NT);
Explanation I For the purposes of this notification, the expression “job work”
means processing or working upon of raw materials or semi-finished
goods supplied to the job worker/ so as to complete a part or whole of the
process resulting in the manufacture or finishing of an article or any
operation which is essential for the aforesaid process.

Thus Central Excise Law, demarcates job work between (1) Job work amounting to
manufacture and (2) Job work doesn’t amounting to manufacture. The treatment of both
sorts of job work under the erstwhile Excise and Service Tax Regime can be summarized
below;

Job work amounting to Job work not amounting to


manufacture manufacture
Taxability Any activity amounting to Any activity amounting to
under manufacture is liable to Excise manufacture doesn’t amount to
Central Duty, per section 4/ 4A of Central rendering of services excluding
Excise Excise Act, 1944 alcoholic liquor for human
consumption, Section 66D (f) of
Finance Act, 1994.
Exemption Notification No. 214/86-CE NA
exempts job work charges subject
to the condition that, after being
supplied to principal
manufacturer, he would remove
the final goods on payment of
Excise Duty. Necessary conditions
under notification e.g. an
undertaking by principal
Job work Charges – Taxability

manufacturers are also required


to be fulfilled.

Taxability Central Excise is not applicable Falls under activity clause of


under since no manufacturing activity services and if done for
Service occurs consideration, will be liable for
Tax service tax, section 66B of
Finance Act, 1994 [erstwhile
definition of BAS may also be
referred].
Exemption NA Notification No. 25/2012-ST vide
S. No. 30 (ii) exempts
intermediate job work on good s,
provided that appropriate excise
duty is paid by the principal
manufacturer.

Treatment under GST


Section 143 read with section 19, goes into length as to how the material should move
from the place of the principal manufacturer and how it should come back. However,
neither of the sections contains any guidance as to what should be the treatment of job
work charges. An attempt has been made under this article to provide a resolution.
Articulation of job work charges can be done through questions in the series;

1. Whether job work charges is supply?


The taxable event under GST is supply, defined to include all the service with
consideration, refer section 7 of GST Law. While job work is defined under the GST Law
(Section 2 (, however the supply is not adequately so and service not at all. Therefore
necessary resort can be made to the definition of services under the Service Tax Law,
refer section 65B (44) of Finance Act, 1994
2 (68) “job work” means any treatment or process undertaken by a person
on goods belonging to another registered person and the expression “job
worker” shall be construed accordingly
65B (44) "service" means any activity……………
Job work Charges – Taxability

Origins of the word: activity – precede with the word “act”

“1a. Treatment: the act or manner or an instance of treating someone or


something” (Merriam Webster)

The generic meaning of service is an activity, and job work is any treatment. The
activity and treatment are used in same context, and by tracing the origins of both
activity and treatment, it can be concluded that job work falls within the purview
of activity and hence a service and hence a supply.

2. Whether job work charges are taxable?

Take an example of an Automobile manufacturer (located at Haryana), the manufacturer


procures a sheet metal assembly from his vendors and sends the same to a job worker
(located at Haryana) for painting job at a defined price of INR 100. The turnover of the
job worker exceeds the normal threshold limit for registration under GST. Through the
below table, we can try to ascertain whether the said job work is chargeable to GST;

There shall be a Going by the understanding above, Painting job work is a


supply service and hence a supply
The supply should Applying the general rule of place of supply under section 12
be Intra State or (2) of IGST Act, the place of supply is location of Automobile
Inter State Manufacturer viz. Haryana. And the location of job work is also
Haryana, the supply therefore qualifies to be Intra State
There should be INR 100 is being charged by job worker and conditions of
value of supply Transaction Value prescribed under Section 15 of CGST Act are
also satisfied, therefore we have a measure for value
There should be rate No Exemption exists under Notification No. 10/2017 (Rate),
of tax therefore we can at least say, that there will be a rate of tax.
[The question of actual rate of tax is explained later in the piece]
There should be Taxable person means a person who is required to registered
person from whom under section 22 to 24, the said condition also stands satisfied
collection can be by job worker in the present case, given his turnover exceeds
made the registration threshold.

Based on the above tests, job work charges shall be chargeable to GST.

3. If job work is a taxable supply, what classification needs to be adopted?


Job work Charges – Taxability

In para 1 above, we had tested the sanctity of job work as supply within the main
definition of supply, but interestingly, job work’s identity qua supply can be seen
from following perspective as well.

3.1 Contribution of higher value inputs for job work by job worker

Job work has been defined vanilla in section 2 (68) of job work as viz. mere
treatment of goods by another person would make the treatment as job work.
Bus does it? What if the job work contributes inputs of a substantial value in
the process of job work, will it still be called as job work. Following cases can be
of aid

Prestige Engineering (India) Ltd vs CCE [1994 (73) ELT 497 (SC)]
The traditional meaning of job work was defined by the Hon’ble Supreme Court
in the case of M/s Prestige Engineering (India) Ltd supra, we can analyze the
same in parts;
Now, what does the expression `job work' mean?

The ordinary definition given in Notification No. 119/75-CE wasn’t given


absolute meaning by the court
….On this question, the Explanation is not of much assistance……

Notification No. 119/75-CE is a pre reform exemption notification. In 1975, the


Cenvat Chain as we understand today, didn’t have much prevalence and the
Central Excise legislation was not fully geared up to enforce the “Neutrality
nature of Job work” by then. Central Excise Tariff was not based on HSN system.
(Pun intended, how come one born in 1990s know such things?). Notification No.
119/75-CE was primarily meant for small scale industries, and therefore the
Supreme Court provided its own wisdom and color to job work .;
………The Concise Oxford Dictionary assigns several meanings to the
expression `job' but the relevant meaning having regard to the present
context is "a piece of work especially one done for hire or profit". The
expression `job work' is assigned the following meaning: "work done
and paid for the job"……..
…………The Notification, it is evident, was conceived in the interest of
small manufacturers undertaking job-works. The idea behind the
Notification was to help the job-workers - persons who contributed
mainly their labour and skill, though done with the help of tools,
gadgets or machinery, as the case may be………..
Job work Charges – Taxability

……..The Notification was not intended to benefit those who


contributed their own material to the articles supplied by the customer
and manufactured different goods………….

………..We must hasten to add that addition or application of minor


items by the job-worker would not detract from the nature and
character of his work…………

To summarize the pronouncement, we can say;

 Job work mainly is a concentration of labour and skill with the use
of gadgets
 Although, use of minor items by job workers’ won’t affect the nature
of job work
 However, the process involving inclusion of substantial value
materials doesn’t come within the purview of job work.

CCusEx vs Abhinav Chemicals [2012 (284) ELT 589 (Tri. – Del.)

Abhinav Chemicals’ judgment is based on the interpretation of job work qua Notification
No. 214/86-CE. The notification has stood the test of time and was a cardinal part of
Central Excise Law before being eaten by GST (still relevant for petro products). It can
therefore rationally be said that this job work exemption works on the idea of Cenvat
Chain and really serves the purpose of job work as intermediate exemption. The Hon’ble
CESTAT, Delhi had the following views on the job work;
The Tribunal distinguished the meaning of job work merely on the basis of Notification
difference;
…..the meaning of job work in respect of Notification No. 119/75-C.E. which
was subject matter of the judgment in the case of Prestige Engineering
(India) Ltd. (supra) cannot be extended to the meaning of job work in respect
of Notification No. 214/86, dated 25-3-1986.

The Tribunal strictly adhered to the meaning of job work given in Notification No.
214/86-CE, which per se doesn’t make any distinction between job worker putting
substantial value goods and job worker putting lower value goods in the process of job
work.
We do not find merit in this contention for the reason that the explanation
defining the expression “job work” does not provide that all the raw
materials for manufacture of final product must be supplied by the principal
manufacturer.
Job work Charges – Taxability

Besides, the Tribunal also accepted the “Neutrality nature of Job work”.

13. Otherwise also even if the benefit of Notification No. 214/86-C.E. was
denied to the respondent that excise duty would have been passed on to
M/s. HLL who would have availed Cenvat credit on entire duty paid on
Aluminium Sulphate cleared by the respondent. Therefore, analyzing from
this angle also the entire exercise would have been revenue neutral.

To summarize the pronouncement, we can say;

 Job work defined by Supreme Court is not relevant for job work defined
specifically otherwise. [Force can also be find in the judgment of M/s Sujag Fine
Chemicals (India) Ltd]
 Higher Value and Lower Value has no meaning
 Neutrality theory should also be considered

CCus vs Sujag Fine Chemicals (India) Ltd. [asd]


The judgment is based on Customs Notification No. 32/97-Cus, the revenue tried to
superimpose judgment of Prestige Engineering supra, on the customs pretext, however
the court ruled in favor of the assessee, dictating;
The word jobbing has not been defined under the Customs Notification No.
32/97-Cus., dated 1-4-1997 and therefore, one would have to apply general
meaning of the word jobbing which would mean carrying out work i.e.
predetermined job as directed by the supplier of raw material and returning
the resultant product to the supplier.

However, the Revenue's contention that the activity carried out by the
respondent is not job work in view of the decision of the Apex Court in the
matter of Prestige Engineering India Limited (supra) is misplaced. In the
above decision the Apex Court was dealing with Notification issued under
the Central Excise Act namely Notification No. 119/75, dated 30-4-1975.

For the purpose of the aforesaid notification the word job work has been
defined in the explanation to the notification. Explanation to the
notification No. 119/75, dated 30-4-1975 is a restricted definition
and it requires job worker to work on the goods supplied by the supplier and
return the same after the raw material has undergone manufacturing
process. There is no such definition of jobbing provided in
Notification No. 32/97-Cus., dated 1-4-1997.
Job work Charges – Taxability

In any event as held by the Supreme Court in the matter of Commissioner of


Central Excise, Trichy v. Rukmani Pakkzvell Traders reported in 2004 (165)
ELT 481 it is impermissible to interpret one notification with the aid of
another notification. It would, therefore, be inappropriate to import definition
of the job work given in Excise Notification No. 119/75, dated 30-4-1975
while construing Customs Notification No. 32/97-Cus*., dated 1-4-1997.

Audi Automobiles & Ors. Vs CCEx [2010 (249) ELT 0124 (Tri. - Del.)]
The captioned judgment was delivered in the context of Rule 10A of Central Excise
Valuation Rules. The appellant therein were automobile body builders, they had
procured chassis from customers and used valuable body building inputs for the
application of body building process. The process was termed as job work for the
purpose of Rule 10A and again the judgment of Prestige Engineering supra was
distinguished on the context;

15. …………….. The notification, it is evident, was conceived in the interest


of small manufacturers undertaking job-works. In other words, the Apex
Court accepted the meaning of the job work bearing in mind the context in
which the expression was found to have been used in the said notification
No. 119/75. It is true that the Apex Court has also observed that the idea
behind the notification was to help the job-workers who had contributed
mainly their labour and skill, though the implementation of works was with
the help of tools, gadgets or machinery. Apparently, the entire discussion
was with reference to the context in which the said expression was
found to have been used in the said notification. It was specifically
observed in the said decision that the notification was not intended to
benefit those who had contributed their own material to the articles supplier
by the supplier and manufactured a different products.

16. Considering the facts of the said case and the context in which the
expression 'job work', had been understood and explained by the Apex Court
in Prestige Engineering (India) Ltd., it cannot be said that the Apex Court
has ruled that the expression 'job-work', in every provision of law is to be
understood irrespective of the context in which the same is used therein.

By going through the above judgments, we can conclude the following;


1. The meaning of job work is not universal
2. The Supreme Court judgment of Prestige Engineering has lost its value in the era of
Cenvat and Set off chain
Job work Charges – Taxability

3. Neutrality theory is also of importance when it comes to determining whether a


process can be said job work or not
4. Job work as defined in Notification No. 119/75-CE is restrictive, whereas the one
defined in Notification No. 214/86-CE is expansive.

Now that we have some guidance as to whether a process should be considered as job
work under GST or not, we can take an illustration of a Car manufacturer (‘A’) who
procures Sheet Metal part (‘FG’) at INR 15,000 per piece from a Tier 1 Supplier (‘B’), A
sends its logo (‘Child Part’) valuing INR 200 to B which is to be AFFIXED in the FG. The
cost sheet of B includes Metal costing INR 10,000, Overheads of INR 2,000 and Profit of
3,000. The question now is, Can the mere affixation of Child Part be considered as job
work? And can ‘A’ send the Child Part tax free under the job work procedure laid down
under section 143 ibid?

Applying the definition of job work as given in section 2 (68) supra and the principles
founded through the discussed judgments, it will be rational to say that even
AFFIXATION of a part would lend it to a treatment over the part and hence be covered
as job work. Consequently, the procedure under section 143 can be followed.
With all due respect to the above interpretation, the AFFIXATION process can also be
said to be not a job work, on the ground that treatment is being given to the FG by
affixing the Child Part rather that the other way around.

3.2 Deeming fiction under Schedule II


Schedule II of CGST Act provides the activities which are to be treated as supply of goods
and to be treated as supply of service. S. No. 3 goes like this;
3. Treatment or Process
Any treatment or process which is applied to another person’s goods is a
supply of service

Apparently, the above supply of service and the definition of job work contain similar
wordings with the difference

 That job work is defined “active”, while S. No. 3 defined as “passive”. Not much
of a difference.

 Another noticeable difference is that while job work uses the words “undertaken”,
S. No. 3 uses the words “applied”.

The thoughtful reason for such difference could be due to the fact that while job
work is defined in the context of Principal manufacturer (hence the expression
Job work Charges – Taxability

“undertaken” third person is used), S. No. 3 is defined in the context of Job worker
(hence the expression “applied” first person is used).

In Para 1 above, we had seen that job work is in the nature of services, and Schedule II
vide S. No. 3 only solidify the same. It can therefore be concluded that job work is supply
of service and given that no exemption has been provided in the GST Act(s) or the rules
or the Notifications thereunder, the same shall be a taxable supply.

At the same time we need to keep in mind that any treatment which doesn’t satisfy the
process of job work, will have to be classified as per the relevant provisions of the Act.
Whether it will be supply of taxable goods or taxable services, will depend upon the facts
involved.

4. What should be the rate of tax?


The rate of tax can be summarized through following diagram;

1 Carrying out an intermediate production process as job work in relation 0


to cultivation of plants and rearing of all life forms of animals, except the
rearing of horses, for food, fibre, fuel, raw material or other similar
products or agricultural produce.
2 Carrying out an intermediate production process as job work in relation 0
to cultivation of plants and rearing of all life forms of animals, except the
rearing of horses, for food, fibre, fuel, raw material or other similar
products or agricultural produce.
3 In relation to Printing of newspapers 5%
4 In relation to Textile yarns (other than of man-made fibres) and textile 5%
fabrics
5 In relation to Cut and polished diamonds; precious and semi-precious 5%
stones; or plain and studded jewellery of gold and other precious metals,
falling under Chapter 71 in the First Schedule to the Customs Tariff Act,
1975 (51of 1975)
6 In relation to Printing of books (including Braille books), journals and 5%
periodicals
7 In relation to Processing of hides, skins and leather falling under Chapter 5%
41 in the First Schedule to the Customs Tariff Act, 1975 (51of 1975)
8 Other job works – Residuary 18%