Service Tax in Excise Exempted State

Exemption if job work done where final product is dutiable.

Luckily the rigours of possible duty liability on job work have been considerably reduced by exemption notification No. 8/2005-ST dated 1-3-2005. This notification exempts taxable service of production or processing of goods for, or on behalf of client, referred to in clause 65(19)(v) of Finance Act, 1994, from whole of service tax, if prescribed conditions are fulfilled.

Basically, the notification exempts processing of goods where the goods after processing are returned back (‘returned’ itself means ‘sending back’!) to client (raw material supplier) for use in or in relation to manufacture of ‘other goods’ by the client. The ‘other goods’ should be such that appropriate duty should be payable on such goods.

No service tax if job work results in ‘manufacture’.

The exemption notification states that ‘production’ should not amount to ‘manufacture’ within meaning of section 2(f). This has raised fears in minds of job workers that if job work amounts to ‘manufacture’, service tax will be payable as exemption notification will not apply. This fear is incorrect as the definition of ‘Business Auxiliary Service’ itself says that it does not include any activity that amounts to ‘manufacture’ within the meaning of section 2(f) of Central Excise Act. Thus, if job work amounts to ‘manufacture’, it is out of purview of taxable service. Hence, question of giving ‘exemption’ does not arise.

In short, if job work results in new and identifiable and marketable product, it is ‘manufacture’ and completely out of definition of ’Business Auxiliary Service’. It is ‘excluded service’, not ‘exempted service’. No tax will be payable.