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JOB WORK ?

Aman Jain (Company Secretary in Practice) (165 Points)

20 February 2009

Dear Friends,

Please resolve my problem:

A company X Ltd (Foreign) made JV with other Indian company Y Ltd and establishes JV Company Z ltd. Now X Ltd. made an agreement with Z Ltd. conditions are below:

That

1. X ltd. will provide know how to Z ltd and Z ltd will pay the royalty for this.
2 Z will manufacture the particular item through this know how.
3. Or Z can also permit to manufacture this particular product through 3rd party and then said item will be packed by Z in the boxes of X ltd. and send to the X ltd under this agreement

4. . Then Z send the raw material and know how to Y ltd. for manufacturing? And one important thing that Z Ltd. registered as a trader not as a manufacturer.

Now dear friends, My query is

1. Can we call this activity between Z & Y as Job work done by Y Ltd.?

Or

2. If we can call this as job work then is it possible for Z Ltd. that under a trader registration, Company has the power to make this kind of arrangement?

Views are solicited.

regards

Aman Jain
Mob. No. +91-97174.900.58
+91-93137.82.760
Email: j.aman1983 @ gmail.com

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4 Replies

Rajesh Kumar (Advocate- Tax) (7806 Points)
Replied 20 February 2009

X, Y & Z are all different legal entities.

As X, a foreign company will provide know how to Z, and Z will pay royalty; Z is required to pay sevice tax under reverse charge method on the royalty paid.

Z is the manufacturer. X is merely a brand name owner, he is not the manufacturer.

When Z is sending the raw material to Y for manufacture, for excise purposes Y will be the manufacturer as he is doing the manufacturing. Since Z is registered as trader, he cannot send the material to Y either under 57F4 challan or claim exemption for job worker under Notification 214/86. After receipt of the material he can pack the goods in X's cartons. Check whether the packing amounts to deemed manufacture or not?

The term job work has not been defined anywhere. However, in commerce parlance it is known as doing some activity on the raw material suplied by some other person. On this view Y is the job worker as he is doing the work on the material supplied by X. Nevertheless, Y will not get any job work exemption, and required to pay duty as Z is not registered as trader and cannot take responsibility of duty payment.

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Aman Jain (Company Secretary in Practice) (165 Points)
Replied 21 February 2009

Dear Rajesh,

Thanks for reply.

you said in your answer that

1. Z will pay the royalty to X = agreed

2. X is not manufacturer = agreed

Here are some points arises that

if we take reference of supreme court cases i.e.

1. M/s Ujagar printers V/s UOI 1989 (39) ELT 493 (S.C.)

2. Pawan Biscuits Co. Ltd. V/s CCE, Patna 2000 (120) ELT 24, SC

Then we find in this case that Y is the manufacturer. (According to tests provided by Supreme Court)

But now I confused with the concept of deemed manufacturer, in our case if we say that Y is manufacturer and Z is deemed manufacturer (because of packing the goods) . Can it possible that both parties at same time held as manufacturer and deemed manufacturer?

Views are solicited.

Rajesh Kumar (Advocate- Tax) (7806 Points)
Replied 21 February 2009

In Excise, the person who does the activity of manufacture is manufacturer. It is possible that activity done by both, Y & Z amounts to manufacture, and both are manufacturers. If the product is covered in the thisrd schedule, or attract some chapter note of deemed manufacture, the activity of packing by X will amounts to manufacture, and X will be a manufacturer.

Y is working on the material supplied by X. Thus if X is registered as manufacturer, he may send the material to Y on 57F4 challan, and Y may take the benefit of exemption to job worker. If however, X is not registered as manufacturer, Y has to pay duty.

Further, you also have to take care of service tax on job work under business auxiliary service.

Aman Jain (Company Secretary in Practice) (165 Points)
Replied 24 February 2009

Dear Rajesh,

The information which I provide you was wrong that Z himself pack goods. But the real situation is that Z sends the packing material to Y and Y pack the good in the box of Z and send to the Z. I am sorry for this.

From this the situation is clear that Y is the manufacturer.

But only one problem arise here if Z is not manufacturer then is it possible to Z that as a trader Z is eligible to give royalty to X. is it permissible under Indian acts and regulation because X provides know how for manufacturing. If Z uses third party involvement as per agreement then is royalty payment permissible under Indian Law.

Views are solicited.

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