Service Tax on Job Work

Paper Processors (PP) engaged in slitting of Paper Rolls into two pieces. Paper Rolls of various widths are supplied by the principles.

1.   First check the process of Slitting of Printing Paper Rolls carried out by the Job-worker

2.   If the process does not amount to manufacture U/s 2(f) of CEA then service Tax is payable.

3.   If the process amount to mfg U/s 2(f) , then check the dutiability of the slitted printing paper Rolls.

4.   If the product is Excisable then no ST is payable [Excisable includes NIL rate as well as exempted ]

5.   If the product is not excisable (Taxable) then ST is payable

6.   Thus taxability under ST  laws is linked with manufacturing status vis-à-vis excisability of the product on which process is carried out . In short,  JW is liable to pay ST only if he doesn’t carry out any mfg process U/s 2(f) or if he does carry out a mfg process U/s 2(f) the product he is making is a non-Taxable (Excisable)

7.   Even in case the process does not amount to manufacture, exemption can be claimed as per NN 8/2005

8.   Exemption under NN 8/2005 is available to JW only if Principle manufactures final product which is Excisable [Dutiable as well]  (here excisable does not include NIL rate or exempted) . In other words appropriate duty should be paid on Final Product by the principle

9.   For example if the principle manufactures stationery from the slitted printing paper then we have to see whether the principle makes the payment of excise duty on Stationery items or not. He should pay the duty on the final product. If the stationery items are Nil rated or Exempted then JW will not get the exemption from ST under NN 8/2005.

10.  Now suppose principle sells the slitted printing paper and does not use in further manufacturing then no exemption will be available to JW

*Exemption under NN 8/2005 not available as conditions stipulated therein is not fulfilled

Section 65(19)(v) says that ST is leviable if goods are produced or processed on behalf of a client, which means Job Work is regarded as providing of service and ST is chargeable thereon .

However , last part of section 65(109) specifically  excludes those  Job Work  amounting to mfg u/s 2(f) of CEA and the product produced / processed is Excisable (including NIL/Exempted Rate) 

I shall repeat here again that according to Section 65(19)(v) Job work is liable to ST only if “

(i)   Process carried out by JW does not amount to manufacture

(ii)   Process carried out by JW amounts to manufacture but the Processed product is Non-Taxable under Central Excise Laws (does not fall under CETA)

In other cases JW would not be liable to ST irrespective of the industry, product , Excisability of Principle’s Product etc. 

Now even in case of (i) and (ii) above certain exemption are given from payment of ST subject to certain compliances / fulfillment of certain conditions and these are as under :

Job work in relation to manufacture of alcoholic beverages

ST on JW is payable if process does not amount to mfg or even if process amounts to manufacture the product processed is not liable to excise duty under CEA. In case of Alcoholic Beverages, though Excise  duty is leviable on manufacture of Alcoholic Beverages ,it is not leviable under CEA but levied by the states (Limited purpose) . Thus if a person carries out any job work in relation to manufacture of Alcoholic Beverages one cannot say that since excise duty is payable on this product  no ST liability would arise.

For instance :

Tuunn Processors carry out job work of processing alcoholic beverages on behalf of Nasha Corporation.  Total Job Charges during September 2011 is Rs. 52 Lacs. Excise duty paid by JW (as manufacturer)  on the Alcoholic Beverages) is say Rs. 5 Lacs under State law. Inputs used in making Alcohol is Rs. 27 Lacs on which excise duty paid is 2 Lacs . No cenvat credit is taken under the state law.

Under normal circumstances ( in case of any other product ST payable would have been 10.3% on 52 Lacs) but in case of alcoholic beverages exemption is granted in calculating the taxable value of Service . Here ST would be payable only on Rs. 52 Lacs – 27 Lacs – Value of inputs used . Now this exemption is granted subject to the condition that no CC on inputs is taken . here excise duty paid on inputs is Rs. 2 Lcas and excise duty payable on output is 5 lacs but CC is not availed .

Let us see the net impact here :

Option 1 : If CC on Inputs availed

Excise duty payable on Alcoholic beverages                           5 Lacs

Less : CC on Inputs                                                               2 Lacs        

                                                                                              -----------    3.00 Lacs

Service Tax @10.3% on Rs. 52 Lacs                                                     5.36 Lacs  

(No exemption is available under NN 39/2009 as CC

Of Rs. 2 Lacs on Inputs is availed

Total tax Liability                                                                                      8.36 Lacs

Option 2 : If CC on Inputs availed

Excise Duty Payable                                                                             5.00 Lacs

(No CC on Inputs availed )

Service tax @ 10.3 % on Rs. 52 Lacs – Rs. 27 Lacs )                    2.58 Lacs

Total Tax Liability                                                                                 7.58 Lacs

Second option is better

Suppose in the above case Excise duty paid on Inputs is Rs. 4 Lacs

Option 1 : If CC on Inputs availed

Excise duty payable on Alcoholic beverages                   5 Lacs

Less : CC on Inputs                                                               4 Lacs        

                                                                                          -----------     1.00 Lacs

Service Tax @10.3% on Rs. 52 Lacs                                             5.36 Lacs  

(No exemption is available under NN 39/2009 as CC

Of Rs. 2 Lacs on Inputs is availed

Total tax Liability                                                                                      6.36 Lacs

Option 2 : If CC on Inputs availed

Excise Duty Payable                                                                             5.00 Lacs

(No CC on Inputs availed )

Service tax @ 10.3 % on Rs. 52 Lacs – Rs. 27 Lacs )                  2.58 Lacs

Total Tax Liability                                                                                 7.58 Lacs

First option is better

If the JW is manufacturing Alcoholic beverages in his own account as well for trading purpose then he has to maintain separate records for use of inputs in making Alcoholic beverages in his own account as well as for others on job work basis. So that proper Service tax liability could be computed by taking the benefit of exemption.

Let us now discuss the contents of Circular No. 249/1/2006 relating to manufacture of Alcoholic Beverages

Discussion 1

Queen-fisher Ltd owns the famous brand of Alcohol “Talli” and you want to manufacture and sell the alcohol under the brand name tally. You have the requisite manufacturing capacity. You entered into a licenced agreement with Queen-fisher to use their brand “Talli” and agrees to pay annually Rs. 12 Crores as licence fee for using the brand name . and yoy start manufacture and sell alcohol under the brand name talli and start earning profits . here no Job work carried out by you . you are making and selling the product of your own not on behalf of others . So no question of paying the service tax as no job work is carried out. Licence fee of Rs, 12 crores paid by you to Queen-fisher is liable to be taxed in the hand of Queen-fisher under “ IPR Services”

Note : Here Property (Goods – Alcohol etc. ) , Risks and Rewards rest with you only – If there is a loss you will loose the revenue and if there is a windfall gain you will be the beneficiary. Queenfisher’s gain is limited to Rs. 12 Crores only. 

Discussion 2

Now suppose Queenfisher is the brand owner “Talli” and you have the facility (Factory and othe infrastructure) to manufacture Alcohol. Queen-fisher wishes to get the Alcohol manufactured from you.They agree to pay you annual Job Charges of 12 Crore to get the Alcohol manufactured for 360 days in a year at maximum capacity. Queen-fisher themselves sale the product under their brand name “ Talli” . Here Queen-fisher will earn the profit from sale of Alcohol and if any loss arises they will have to bear the loss. Your profit is limited to the extent of job charges received by you. You will be liable to pay ST on the Job Charges of course subject to exemption under NN 39/2009.

Note : Here Property (Goods – Alcohol etc. ), Risks and Rewards rest with Queen-fisher  only – If there is a loss Queen-fisher will loose the revenue and if there is a windfall gain Queen-fisher will be the beneficiary. Your gain is limited to Rs. 12 Crores only. 

Discussion 2

Now suppose you have the facility (Factory and other infrastructure) to manufacture Alcohol. Queen-fisher  is the Brand owner “Talli” . They wants to manufacture Alcohol themselves and takes on lease your factory and agree to pay Rs. 12 Crore as Lease rent. Profit and Losses from manufacture and sale of Alcohol is of Queen-fisher. Here you are liable to pay ST on Rs. 12 Crores under “Renting of Immovable property”.

Note : Here Property (Goods – Alcohol etc. ), Risks and Rewards rest with Queen-fisher  only – If there is a loss Queen-fisher will loose the revenue and if there is a windfall gain Queen-fisher will be the beneficiary. Your gain is limited to Rs. 12 Crores only.