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Job work under GST regime - Addressing the lacunae
Raghavan Ramabadran, Partner, Lakshmikumaran & Sridharan
Karthik IVRN, Associate
Rohan Muralidharan, Associate
1. The recently concluded
9th GST council meeting, made major inroads
towards implementation of GST and may be considered as one of the
most productive meetings with consensus being reached on various
contentious issues such as dual control and taxing of goods in
territorial waters. However, disagreement on vital aspects such as
classification of goods in proposed four tier rate structure and
classification of services as luxury, standard and basic continue
to persist.
2. In June 2016, the Central Government released Draft Model CGST and IGST Laws in the public domain for comments. Based on the comments of various stakeholders on the shortcomings or improvements required in the Model GST Law, the Government issued the Revised Model CGST and IGST Laws (‘RMGL’) in November 2016. The Revised Model Law is definitely an improvement in juxtaposition to its previous avatar; however, there are many areas requiring clarity and there are few that have newly emerged in the Revised Model Law. One such lacuna that has emerged is in the provisions relating to Job Work.
Job work under Current law
3. Job work has been defined in Rule 2(n) of the Cenvat Credit Rules, 2004 to mean:
“processing or working upon of raw material 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 aforesaid process and the expression “job worker” shall be construed accordingly.”
4. Thus, a job worker is understood to be a person who undertakes any process on the material provided to him.
...The person providing the material to a Job Worker is generally referred as the Principal Manufacturer (‘PM’).
5. In order to appreciate various facets involved, a job work transaction can be divided into the following parts:
Sr. No |
Scenario |
Taxability under current law |
1 |
Removal of inputs/ capital goods from PM to a job worker |
Rule 4(5)(a) of the CENVAT Credit Rules, 2004 protects cenvat credit availed by the PM on inputs and capital goods sent out for job work. Hence, removal of inputs/ capital goods for job work will not put cenvat credit of the PM in jeopardy. |
2 |
Removal of inputs/ capital goods post job work process back to the PM for further manufacturing. |
With a view to reduce burden of tax compliances for small tax payers and to avoid multiplicity of transactions Notification 214/86 - CE dated March 25, 1986 was issued whereby job workers are allowed to remove processed inputs/ capital goods as such after job work without payment of excise duty. The process of Job Work is essentially a service rendered by the Job Worker to PM. However, Section 66D of the Finance Act, 1994, which contains negative list of services also contains an entry by virtue of which any process amounting to manufacture does not amount to a service. Therefore, when the process carried out by Job Worker does not amount to manufacture, it will tantamount to provision of taxable service and therefore, a corresponding exemption provision has been provided in Service Tax at Entry 30 of Notification 25/2012 - ST dated June 20, 2012 which exempts payment of Service Tax on job charges for carrying out an intermediate production process in relation to goods where appropriate duty is ultimately payable by the PM. |
3.
Tax treatment of inputs procured by job worker for carrying out the activity of job work for which exemption has been availed.
In this regard, the department was of the view that since no tax is paid by job worker on removal of processed goods under Notification 214/86 – CE dated March 25, 1986, correspondingly no CENVAT credit shall be allowed on inputs and input services procured by job worker for use in relation to Job Work.
However, the contention of the department was negated by Larger bench in the case of Sterlite Industries (I) Ltd. 2005 (183) E.L.T 353 which held that inputs used by job workers will be eligible for credit even if no duty is paid on his clearances if the final product manufactured by PM out of job worked goods is liable to duty as the job work exemption is not an exemption per se but a mere postponement of payment of duty. This proposition has been subsequently affirmed by various High Courts.
6. Therefore, currently there is option with the PM to ensure that the entire transaction with the Job Worker is exempted from payment of duty/tax. Further, input tax credit of inputs procured by job worker is also allowed notwithstanding non-payment of tax at the time of removal from job worker’s premises.
Under GST regime
7. Taxable event for levying GST is “supply” which has been defined in Section 3 of the RMGL. Supply can be of goods and/or services for a consideration.
...However, those transactions contained in Schedule I of the RMGL would be deemed as a supply even when made without a consideration. For the purposes of this Article, it is relevant to discuss the first two clauses of Schedule I.
8. The first clause talks about “permanent transfer/ disposal of business assets where input tax credit has been availed on such assets”. Use of the words “permanent” and “on such assets” makes it abundantly clear that business assets being transferred should be permanently transferred in the form in which they were procured.
9. Second clause envisages transactions of goods and/ or services between related persons or between distinct persons as specified in Section 10, when made in the course or furtherance of business as a supply. For the purposes of RMGL, Section 10 deems (i) various registrations of the same person within the state or in multiple states (ii) registered establishment of a person in one state and any of his other registered establishments in another state, to be distinct persons. Related person has been defined in Section 2(84) of RMGL more or less in the same manner as it is understood today.
10. Job work has been defined in Section 2(61) of the RMGL to mean undertaking any treatment or process by a person on goods belonging to another registered taxable person and the expression “job worker” has to be construed accordingly and the activity of job work has been deemed to be a service under Schedule II of RMGL.
11. Therefore, in essence, the concept of job work has been recognized and retained in spirit even under the GST law. Having said that, what we need to now deduce is whether or not all legs of job work transaction are exempt as in the current indirect tax regime.
...12. Section 55 of RMGL bears special provisions for job work transaction. Section 55 is a beneficial provision which allows movement of goods to job worker and from there on to another job worker or back to the PM without payment of tax. Benefits under this Section are subject to bringing back to PM’s premises, the goods sent out to job worker’s premises within the time limit of 1 year for inputs and 3 years for Capital goods. Section 55 is not a compulsory provision and the assesse has an option to adopt the provision.
Applicability of Section 55
13. Before going into the applicability of Section 55, it is imperative to analyze whether the supply of goods to and by Job Worker is taxable in the first place for the same to be protected by Section 55. For a supply of goods made to a job worker, no consideration is paid by the Job Worker to PM; secondly, for supply of processed goods by the Job Worker to PM, no consideration is again paid on the value of initial inputs supplied and consideration is only paid towards the job charges. Therefore, we need to understand whether the supply of goods to and by Job Worker de hors the service of job work is a supply without consideration.
14. At this stage, it is relevant to recall the first two clauses of Schedule I which would deem certain situations where no consideration is involved as “Supply”.
15. As discussed earlier, the first clause talks about “permanent transfer/ disposal” of business assets where input tax credit has been availed on such assets. It is a well-established fact that in a job work transaction, there is no permanent transfer of ownership by the PM when inputs/ capital goods move for the purpose of job work.
...Therefore, although input tax credit will be availed by PM on the goods sent to job worker; supply to and by Job Worker will not tantamount to Supply under Clause I.
16. The second clause to Schedule I envisages as supply, transactions between related persons or between distinct persons as specified in Section 10. Sending or receiving any goods to and from a third party job worker not being related or distinct person as defined under Section 10 would not constitute a supply under Clause II also.
17. Therefore, the obvious question that arises for consideration is that when a movement of goods from PM to third party job worker and vice-versa does not constitute a supply under Schedule I, what is the relevance of having Section 55?
18. The only way to break this deadlock is to envision job worker as a related person as a result of which Schedule I is attracted and GST is payable. In such a situation, Section 55 can be applied directly to say that movement of goods between job worker and PM is exempt.
Treatment of job charges
19. Another issue that has emerged in the interpretation of Section 55 is that whether job charges will be liable to tax if the goods are being supplied and received under intimation as provided in Section 55 of RMGL. There is no specific mention of taxability on job charges under Section 55.
20. Section 55(1)(a) talks about bringing back inputs, after completion of job-work or otherwise to any of place of business of the PM without payment of taxes. The exact provision has been reproduced herein below:
“bring back inputs, after completion of job-work or otherwise, and/or capital goods, other than moulds and dies, jigs and fixtures, or tools, within one year and three years, respectively, of their being sent out, to any of this place of business, without payment of tax;”
21.The entire issue hinges on the interpretation of the phrase ‘bring back inputs’. In our opinion, there are two possible interpretations that can be given to this phrase.
...22. The first interpretation being, the words used in the provisions are “bring back inputs” and not “bring back processed inputs” and thus, inputs brought back from job work will not include job charges as under Section 55, what is allowed to be brought back without payment of tax are the inputs that were originally sent out for job work and not the Job Worked Goods. Consequently, job charges are separately liable for tax. In such a case, since the service of job work is anyway taxable, credit of inputs procured by job worker will be available.
23. The second interpretation being that the value of inputs brought back would naturally include job charges as well. Further, what are brought back are also inputs qua the PM. In other words, as regards the PM the processed goods cleared by the Job Worker will also be considered as ‘inputs’ for the PM. The phrase used is ‘bring back inputs’ and not ‘bring back such inputs’. Therefore, inputs should be understood not as inputs that were sent initially by PM to Job Worker but as processed inputs that are received by PM after job work. Further, in an alternate scenario where Section 55 was not resorted to, the transaction value for Job Work Service would also have included the cost of inputs supplied by the Job Worker.
Conclusion
24. The entire jurisprudence in relation to Job Work transactions has always been expounding the proposition that no tax/duty should be paid by the Job Worker for the Job Work being carried out. Even in the GST regime the same understanding should be fostered in order to give full meaning to the special procedure for Job Work transactions under Section 55 of RMGL and continuance of the beneficial status that the Job Workers are enjoying currently.
...25. The provisions of the said section will be rendered redundant and will be dead letter if job charges are made taxable especially when supply of inputs by PM to third party Job Worker and vice versa are not even Supplies under the GST regime being supplies made without consideration and not falling under any of the Clauses under Schedule 1 to the RMGL. It is further submitted that it is a well settled cannon of statutory interpretation that in cases where there are two interpretations possible, the one which is beneficial to the assessee would be preferred.
26.As regards the contention that the credit of inputs/input services used in relation to Job Work at the hands of the Job Worker will be in jeopardy if the Job Charges are exempt under Section 55; it is submitted that Section 55 of RMGL is not an exemption from payment of tax at the hands of the Job Worker but only a mechanism to postpone the payment of tax and reduce compliance costs. Therefore, the credit availed by Job Worker should also be intact as the inputs/inputs services are not being used for making any exempt supply. However, if there is a problem of accumulation of credit at the end of Job Worker then the Job Worker and PM can choose to not avail the benefit of Section 55 and treat every supply as separate taxable supplies and utilize the corresponding input tax credit towards it.
Comments
Please tell what documents are required for movement of goods from job worker to principal after processing. Also if we issue a delivery challan, what will be the value of goods and whether GST amount needs to be mentioned on the challan (if yes then will it be calculated on the value of goods or job charges value)?
Regards
Does the permanent transfer under RMGL envisages the transaction contemplated u/r 3(5) of the CCR 2004?
U/r 3(5) companies transfer goods to Job Worker, normally who adds materials to manufacturing, for conversion and clear back on payment of duty (avail credit and add value for the purpose of valuation)
Does the following provisions in RMGL have any impact on the analysis done -
Proviso to Sec. 55(1):
PROVIDED that the “principal” shall not supply the goods from the place of business of a job worker in terms of clause (b) unless the said “principal” declares the place of business of the job-worker as his additional place of business except in a case- (i) where the job worker is registered under section 23 ; or (ii) where the “principal” is engaged in the supply of such goods as may be notified by the Commissioner in this behalf.
Sec. 55(2):
The responsibility for accountability of the inputs and/or capital goods shall lie with the “principal”.
Explanation 2 to Clause 1 of Schedule V:
The supply of goods, after completion of job-work, by a registered jobworker shall be treated as the supply of goods by the “principal” referred to in section 55, and the value of such goods shall not be included in the aggregate turnover of the registered job worker.