Applicability of service tax on fabrication of leather goods

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

27 October 2010 Dear Members,

Please guide me with respect to the following.

One of my clients which is a private limited company and a manufacturing exporter of leather products gets it's products fabricated from outside fabricators.

It issues all the components e.g. cut leather, lining cloth, thread, adhesive, accessories etc to the fabricators who in turn get the stitching and assembling done applying their own labour. They are paid on piece rate basis on a pre detrmined rate after deducting TDS.

My queries are:
1. Whether service tax/VAT is chargeable on the fabrication charges paid.

2. If yes whether the company is liable to pay service tax/VAT if the fabricator fails to do so.

3. Whether it would make any difference if the fabricator works exclusively for the company and uses only machines owned by the company and leased out to the fabricator.

Thanks & best regards,

CA Kesari Radhey Shyam
93307 14648

RAJIV VIJ

RAJIV VIJ (Expert)
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31 July 2011 Dear Mr. Kesri Radhey Shyam,

please follow the link

http://www.cenexrajkot.nic.in/oio/stax/57_ST_2011.pdf

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RAJIV VIJ

RAJIV VIJ (Expert)
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31 July 2011 Please also read the followings

'Business Auxiliary Services'

The definition of business auxiliary service has been given under clause (19) of section 65. That is:

"business auxiliary service means any service in relation to, -

(i) promotion or marketing or sale of goods produced or provided by or belonging to the client; or

(ii) promotion or marketing of service provided by the client, or

(iii) any customer care service provided on behalf of the client; or

(iv) procurement of goods or services, which are inputs for the client, or

(v) production of goods on behalf of the client, or

(vi) provision of service on behalf of the client, or

(vii) a service incidental or auxiliary to any activity specified to sub-clauses (i) to (vi), such as billing, issue or collection or recovery of cheques, payments, maintenance of accounts and remittance, inventory management, evaluation or development of prospective customer or vendor, public relation services, management or supervision,

and includes services as a commission agent, but does not include any information technology service and any activity that amounts to "manufacture" within the meaning of clause (f) of section 2 of the Central Excise Act, 1944.

Explanation. -For the removal of doubts, it is hereby declared that for the purposes of this clause, "information technology service" means any service in relation to designing, developing or maintaining of computer software, or computerised data processing or system networking, or any other service primarily in relation to operation of computer systems.

The Finance (No. 2) Act, 2004, w.e.f. 10-9-2004 has changed the 'definition of 'business auxiliary service'. The scope of the 'business auxiliary service' has been widened to include services relating to procurement of inputs, production of goods (not amounting to manufacture) or provision of service on behalf of the client. However, activities amounting to "manufacture" are specifically excluded from the scope of service tax. Further, scope of incidental and auxiliary services has been made more specific and restricted to the services, which are incidental to the main services specified in sub-clauses (i) to (vi). Further, illustrative list Of incidental and auxiliary service has not only been redefined but also enlarged.

Notification New Delhi, dated 1st March, 2005.
No. 8/2005-Service Tax 10 Phalguna, 1926 (Saka)
G.S.R. (E).- In exercise of the powers conferred by sub-section (1) of section 93 of
the Finance Act, 1994 (32 of 1994) (hereinafter referred to as the Finance Act), the Central
Government, on being satisfied that it is necessary in the public interest so to do, hereby exempts
the taxable service of production of goods on behalf of the client referred in sub-clause (v) of
clause (19) of section 65 of the said Finance Act, from the whole of service tax leviable thereon
under section 66 of the said Finance Act:
Provided that the said exemption shall apply only in cases where such goods are
produced using raw materials or semi-finished goods supplied by the client and goods so
produced are returned back to the said client for use in or in relation to manufacture of any other
goods falling under the First Schedule to the Central Excise Tariff Act, 1985 (5 of 1986), as
amended by the Central Excise Tariff (Amendment) Act, 2004 (5 of 2005), on which appropriate
duty of excise is payable.
Expalantion.- For the purposes of this notification,-
(i) the expression “production of goods” means working upon raw materials or
semi-finished goods so as to complete part or whole of production, subject to the
condition that such production does not amount to “manufacture” within the
meaning of clause (f) of section 2 of the Central Excise Act, 1944 (1 of 1944);
(ii) “appropriate duty of excise” shall not include ‘Nil’ rate of duty or duty of excise
wholly exempt.
[F. No. 334/1/2005-TRU]
(V. Sivasubramanian)
Deputy Secretary to the Government of India

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