JOB WORK UNDER CENTRAL EXCISE
By Madhukar N Hiregange (FCA, DISA)
& Srikantha Rao T (B.Com, ACA)
Job work is one of the most important aspects that a manufacturer registered under Central Excise should be familiar with not just because it enables him to plan his processes in order to optimise the benefits available under the Central Excise Act 1944 but would also enable him to cut costs on his manufacturing. This is so as the processes which pose problems or which are not cost effective at his end can be sub-contracted or delegated to another manufacturer or processor who is referred to here as the job worker. Many a time, the job worker may be more efficient both in terms of the quality and cost as compared to the main manufacturer due to pursuance of core competencies and economies of scale. Most of the big manufacturers in fact make very good use of this concept and assign non core / standard processes to more than one vendor which enables them to cut down on manufacturing costs.
In the context of the Central Excise law, job work has been defined under 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. It is vital to note here that the process undertaken by the job worker on the goods that are supplied to him for job work, may or may not amount to manufacture.
If one were to go by the definition of the term “job work”, it is evident the raw materials have to be supplied by another person. In Prestige Engineering India Ltd v CCE Meerut, (1994 (09) LCX 0110), the Supreme Court held that when the job worker contributed his own material to the goods supplied by the customer and engaged in manufacturing, the activity was not one of job work. However, minor additions by the job worker would not take away the fact that the activity was one of job work.
Job Work and Manufacturing
Since excise duty is on ‘manufacture’, duty liability arises only when the goods are manufactured during job work. The test as to whether the process amounts to manufacture or not would be determined by analyzing whether a new article having a distinctive name, character or use emerges or not from the said process in accordance with the decision of the Honorable Supreme Court in Delhi Cloth and General Mills Co. Ltd Vs UOI (1962(10) LCX 0001). Where the goods are manufactured during job work, the job worker would be liable to pay duty of excise on the goods so manufactured unless the principal manufacturer who has supplied him the goods for job work, furnishes a declaration under Notification 214/86 dated 25.03.1986 which exempts goods manufactured by a job worker from duty of excise provided the said goods after job work are returned to the principal or cleared for export or cleared for home consumption on payment of duty of excise. Removals for job work under Rule 4(5) (a) of the Cenvat credit rules presume that the declaration under 214/86 is met. Where the goods are returned to the principal, the principal should either clear it on payment of duty or use it in his manufacturing process which should result in a dutiable product being manufactured. The declaration as stated above should be given to the Assistant Commissioner of Central Excise who has jurisdiction over the factory of the job worker. Today it is a practice that such declarations are not given in the light of the amendments in the law to accept the assessees own documents.
It is important to note that in the absence of the declarations / removal under Rule 4 of CCR 2004, the job worker himself would be liable for duty of excise and if he were manufacturing branded goods would be liable from day one. In case he is not manufacturing branded goods he would be eligible for the exemption upto Rs.150 lakhs under the SSI exemption discussed later and after that value would be liable to pay the excise duty. He would in such cases be eligible for the credit on the inputs on fulfilling the conditions of receipt, adequate documentation and registration.
Job work & SSI exemption
Notification 214/86 CE (NT) has another significance and that is where the job worker also avails the benefit of notification 8/2003 CE (NT) dated 01.03.2003, the job work done under this notification would not be included for the purpose of determining whether or not his turnover has exceeded the said limit of Rs. 150 lakhs for the purpose of determining duty liability if any or Rs. 400 lakhs for the purpose of determining eligibility to exemption u/n 8/2003 CE in the subsequent financial year.
Job work – Central Excise v Service Tax
Where the processing undertaken by the job worker does not amount to manufacture, the said job worker could be liable to service tax under the heading ‘Business Auxiliary Service’ as per which, the activity of production or processing of goods for, or on behalf of the client would be taxable. The liability in terms of job work can arise where the processing is done for the client. However one should note that where the processing amounts to manufacture, the same would not be taxable under service tax and the liability if any would have to be studied under Central Excise. Even if the taxability of the processing is to be seen under Business Auxiliary Service, the job worker would be entitled to exemption from service tax under notification 8/2005 ST where the goods after processing are returned to the principal for use in or in relation to manufacture of dutiable goods which are cleared on payment of duty of excise. Where the goods to be cleared by the principal are exempted goods or goods which are chargeable to nil rate of duty, the exemption to the job worker u/n 8/2005 ST would not be available and he would be liable to service tax.
However wherever the customer is not discharging the duty of excise the job worker would be liable pay the service tax unless the service does not exceed Rs.10 lakhs threshold limit. In such cases the job worker would be eligible for the credit of the capital goods/ inputs and consumables as well as input services used for completing the process. This could at times be preferable method of operating to avoid disputes on the input credits.
Job work & Cenvat Credit
Cenvat credit can be availed on materials sent for job work as per rule 4(5)(a) of the Cenvat Credit Rules, 2004. It has to be established from the records, challans or memos or any other document produced by the manufacturer taking the Cenvat credit that the goods have been received back in the factory within one hundred and eighty days of goods being sent to the job worker. Therefore maintenance of proper inventory accounting records, job work register, details of nature of processing undertaken and quantities received back along with scrap generated would gain importance. The movement should be under a challan giving the particulars as to the Rule under which the same is being sent. The challan would be in triplicate with two copies of the same accompanying the goods to the job worker who would return one copy with the goods being sent back to the principal after completion of the process. Where the goods are sent back in lots, he is free to send his own delivery challan with the goods and send back the original delivery challan received from the principal, with the final consignment being sent to the said principal.
If the inputs or the capital goods are not received back within one hundred and eighty days, the manufacturer shall pay an amount equivalent to the Cenvat credit attributable to the inputs or capital goods by debiting the Cenvat credit account with the amount so attributable to the inputs or capital goods not received. But the manufacturer can take once again the Cenvat credit so debited when the inputs or capital goods are received back in his factory at any future date.
The Cenvat credit shall also be allowed in respect of jigs, fixtures, moulds and dies sent by a manufacturer of final products to a job worker for the production of goods on his behalf and according to his specifications. The restriction with regard to the requirement of receiving the goods back within 180 days from the date of sending would not apply to such tools, dies, fixtures and moulds.
Can more than one job worker be involved?
Yes. It is possible for a principal to send the goods to one job worker who does part of the process required and then forwards the goods to another job worker who does the remainder of the process. In this case, the first job worker can send the goods to the second job worker under his own delivery challan along with the copy of the challan received from the principal. The second job worker would then send back a copy of the challan received from the first job worker back to him and the copy of the original challan of the principal to him with his own challan. The period of 180 days would be reckoned from the date of sending of the goods by the principal to the first job worker.
Can the goods be sent to the job worker's premises directly from the supplier's premises?
Yes. The principal manufacturer/raw material supplier can also ask his supplier to despatch the materials directly to the job worker's factory without receiving it at his factory. For this, the supplier would have to ensure that his invoice mentions the job worker as the consignee and the principal manufacturer as the buyer. The principal manufacturer would be entitled to claim cenvat credit on his purchases only when the processed materials are received at his factory from the job worker's premises.
Can the goods processed or manufactured by the principal be sent to another premises for a process not amounting to manufacture?
Yes. Rule 16C of Central Excise Rules 2002 allows a manufacturer to send the manufactured goods other than prototypes, to another premises for any process not amounting to manufacture, without payment of duty, with the permission of CCE. The goods can either be received back or cleared from the other premises on payment of duty or cleared for export. The other premises being referred here may or may not be registered. Where semi-finished goods are to be sent, the permission would have to be obtained from the CCE u/r 16B. Semi-finished goods can be manufactured at such other premises and cleared for export or on payment of duty for home consumption only when the other premises is registered under Central Excise. Goods manufactured in the other premises can also be received back into the factory of the principal.
Can a manufacturer availing the benefit of SSI exemption under Central Excise send goods for job work?
Yes. The SSI manufacturer may note that two notifications have been issued under Central Excise – 83/1994 CE dated 11.04.1994 and 84/1994 CE dated 11.04.1994 which allows him to send goods to the job worker for job work and enables the job worker to clear the processed goods to the factory of the said manufacturer without payment of duty. The principal manufacturer in this case would have to give a declaration in this regard to the authorities having jurisdiction over the job worker's factory regarding the usage of the processed goods for manufacturing the goods enjoying exemption under notification 8/2003 CE. The aforesaid two notifications would come into play where the goods involved are those which are covered under the SSI exemption notification 8/2003 CE and the said exemption is being availed by the principal manufacturer. For the purpose of determining the limits of Rs. 400 lakhs or Rs. 150 lakhs under notification 8/2003 CE, the treatment of the clearances under these two notifications is similar to that under notification 214/86 CE.
Valuation issues in job work
One of the common issues confronting job workers paying duty of excise is that of valuation. Until recently the valuation had been in accordance with the decision of the Honorable Supreme Court in Ujagar Prints Ltd Vs Union of India (1989 (01) LCX0047) where the assessable value for the purpose of charging excise duty was said to comprise the value of raw materials supplied by the principal plus the conversion charges or job charges incurred by the job worker plus his profit margin. The margin of the principal on those goods manufactured by the job worker even if he merely traded in those goods was not to be subjected to duty of excise. But this position underwent a change from 01.04.2007 because of an amendment to the Central Excise Valuation (Determination of Price of Excisable Goods) Rules 2000.
A new Rule 10A was inserted in the said Rules which stipulates that where the goods are sold by the raw material supplier/principal manufacturer from the factory of job worker, the value would have to be the transaction value of the goods so sold by the raw material supplier/principal. This would apply only when the raw material supplier and the buyer of the goods are not related and price is the sole consideration for the sale and the goods are sold for delivery at the time of removal from the job worker's factory.
Example: - Assume the value of raw materials supplied by principal be Rs. 10000 and the job workers conversion cost be Rs. 1500 and his profit margin be Rs. 500. If the principal sells the goods processed by the job worker at Rs. 15000 per unit, what is the assessable value for the job worker?
Answer: - As per the decision in Ujagar Prints case, the assessable value for charging duty of excise would have been Rs. 12000. This method would hold good till 01.04.07. Presently, by virtue of Rule 10A introduced as aforesaid, the assessable value for the job worker would not be Rs. 12000/- but would be Rs. 15000/- (that is the price charged by the principal for sale of the processed goods).
In a case where the goods are not sold by the principal manufacturer at the time of removal of goods from the factory of job-worker, but are transferred to some other place from where the said goods are to be sold after their clearance from the factory of the job worker, the normal transaction value of such goods sold from such other place at or about the same time has to be adopted. This, in other words follows the principle of depot based valuation under Central Excise applicable where goods are cleared to depots of manufacturers and sold therefrom. Where such goods are not sold at or about the same time, then the normal transaction value of such goods at the time nearest to the time of removal of said goods from the factory of job-worker, shall have to be adopted. The cost of transport from the premises where from the goods are sold, to the place of delivery, would not be included in assessable value.
However this would not be the position if the principal were further subjecting the same to a process to complete the manufacture.
Precautions to be taken by the principal manufacturer generally
The principal manufacturer is responsible for the duty payment on the scrap generated at the job worker’s premises. The job worker may also remove such scrap on payment of appropriate duty of excise and in which case principal manufacturer will be relieved from his duty liability. The principal manufacturer should therefore have a proper mechanism for the purpose of tracking the quantum of waste or scrap generated at the job worker's premises.
In this article the paper writers have examined some of the important aspects with regard to job work.