In this article I have discussed on the following question that I came across recently.
Whether manufacturing of excisable goods which are cleared on payment of duty by job worker is covered under the definition of exempted services thereby attracting denial of cenvat credit under Rule 6 of Cenvat Credit Rules, 2004 (‘CCR’)?
The discussion pertains to a period post the introduction of negative list approach under service tax i.e. with effect from 01.07.2012.
Position of job worker under Excise
From an excise point of view, if a job worker is engaged in carrying out manufacturing activity, the job worker is treated as a manufacturer as per section 2(f) of the Central Excise Act and is liable to pay excise duty on clearance of excisable goods from his premises.
In case of job worker manufacturer, there is an option granted to the principal for discharging the duty on behalf of the job worker under notification no. 214/86. In such a case the job worker manufacturer is exempted from payment of excise duty. As per the decision of Punjab & Haryana High Court in the case of CCE versus Happy Forging Limited, cenvat credit is available to a job worker in the above scenario.
Further in a case where the job worker manufacturer himself is discharging the excise duty on the goods cleared from his premises, he should very clearly be eligible to claim cenvat credit of the inputs and input services used by him.
Position of job worker under service tax
Service is defined as “Any activity carried out by a person for another for consideration” (relevant extract only).
In case of a job worker, the job worker carries out the manufacturing activity on behalf of the principal, hence it is an activity carried out by a person for another. Further the job worker receives job work charges and hence there is consideration. Accordingly the activities carried out by job worker are covered under the definition of service.
Entry no (f) of the negative list (section 66D) is also relevant which reads as “Services by way of carrying out any process amounting to manufacture or production of goods excluding alcoholic liquor for human consumption”
It must be noted that if engaged in any manufacturing activity the job worker would also be covered under the negative list entry no. (f).
Getting covered under the negative list has the following implications:
• The job worker manufacturer is not covered under the ambit of service tax law.
• The job worker manufacturer is covered under the definition of exempt services as per Rule 2(e) of the CCR.
Position under Cenvat Credit Rules
As per Rule 2(e) of CCR (with effect from 01.07.2012), Exempted service means a-
“(1) Taxable service which is exempt from the whole of the service tax leviable thereon; or
(2) Service, on which no service tax is leviable under section 66B of the Finance Act; or
(3) Taxable service whose part of value is exempted on the condition that no credit of inputs and input services used for providing such taxable service, shall be taken;
But shall not include a service which is exported in terms of rule 6A of the Service Tax Rules, 1994”
On a careful reading of Clause 2 of Rule 2(e), the following characteristics must be present to be covered under the referred clause:
• The activity should be covered under the scope of service - defined under clause 44 of section 65B.
• Service tax should not be leviable on the service u/s 66B.
As already discussed, the activity of job worker manufacturer is a service.
Section 66B reads as “There shall be levied a tax (hereinafter referred to as the service tax) at the rate of fourteen per cent on the value of all services, other than those services specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed.”
Section 66B excludes the services listed in the negative list from its scope. As already discussed, job worker manufacturer is covered under the negative list of services.
Hence a job worker manufacturer satisfies both the above characteristics and is accordingly covered under the definition of exempt services.
As per rule 6(1) of the CCR, cenvat credit of inputs and input services used for the manufacture of exempted goods or providing exempted services is not allowable. Rule 6(2) and 6(3) of the CCR contain the procedure for giving effect to the above provisions.
A job worker manufacturer is liable to pay excise duty under the central excise act and hence should be eligible for cenvat credit. At the same time he is also a provider of exempt services thereby attracting disallowance of cenvat credit under Rule 6 of CCR.
The referred judgement of Punjab & Haryana High Court delivered in the year 2011 had held that the goods cleared by job worker under notification no 214 / 86 are not exempt goods and hence cenvat credit on the inputs and input services is eligible. However the said judgement was for a period prior to the negative list regime i.e. prior to 01.07.2012 and hence would not have much relevance on the issue discussed.
As per the provisions discussed above, with effect from 01.07.2012 in my view a job worker would not be eligible to claim cenvat credit on the inputs and input services used by him for the manufacture and clearance of excisable goods on payment of excise duty.
Request the readers to provide their valuable views on the issue.
Thanks & Regards