At the outset we would like to highlight the issue that the painting activity is in nature of job work not amounting to manufacture hence not liable to excise duty (as there is no new article which is being created at job workers end ) However the said activity amounts to works contract under VAT Act.
Application of Service Tax.
1) Job work is exempt from provisions of service tax on satisfaction of following conditions:
(a)such goods are produced/processed from the raw-material or semi finished goods supplied by the client and
(b) goods so produced/processed are returned back to the said client for use in relation to manufacture of any other goods falling under the first schedule to the central excise tariff act on which appropriate duty of excise is payable. However the final products shall not have nil rate of duty or exempt from duty of excise. (this needs to be checked at your end as what does the other party do with the duly painted parts he would be carrying out additional activity of fixing the parts etc and then packing and then dispatching to end customer, and this activity at your customers end will be manufacture and he will be liable for excise duty)
Service tax Notification no. relevant No. 8/2005 dated 1st March 2005 amended vide Notification no. 19/2005 dated 7/06/2005 and excise notification no. 214/86 dated 25/03/86.
Service tax on works contract: WCT concept was introduced wef 01/06/07 This category seeks to tax those services wherein transfer of property in goods is involved during the execution of works contract. The tax is on the services involved in the execution of a works contract.
As this results in a works contract as per VAT act this will be chargeable to service tax under works contract category and registration under this category is required to be taken with Service tax department.
The following options are available under service tax.
(A) Pay WCT tax as per composition rate i.e 4.12% ( 4%+ 2% Edn cess and 1%SHEcess) on total value of contract excluding value of transfer of property of goods and VAT in this case no Cenvatcredit is admissible on duty and cess paid on inputs used in relation to such works contract. However credit on capital goods used for providing the service as well as the input service credit (insurance telephone manpower supply, supply of tangible goods) would be available. The company has to send an application to the department stating therein that for this specific contract it is opting for composition once composition is opted it cannot be withdrawn and it is specific for each contract.
(B) Pay WCT tax @ 10.30% (10%+ 2% Edn cess and 1%SHEcess ) (on total value of contract excluding value of transfer of property of goods and VAT and you can claim Cenvat credit on all inputs and input services and capital goods used for the purpose of the works contract (service tax on labour bills , excise duty on consumables etc. CVD on paints)
* Can Cenvat credit of CVD, Education Cess and Higher Education cess paid on import of Delta Coating paint is available or not.
Answer : if we opt for composition scheme under works contract no credit is admissible however under normal rate of service tax credit is admissible. (job worker also cannot claim Cenvat credit as his activity is not manufacture nor liable for service tax)
* Situation 2 and 3 are identical and both situation as stated amounts to job work all formalities as per excise rules relating to job work to be complied with how ever no cenvat credit can be availed on inputs.
There is CBEC circular where in department does not seem to agree that job worker can pay duty : Job worker who receives the material can return the same after job work without payment of duty. Since duty liability is on the manufacturer and not job worker, the job worker does not have tp pay duty. Hence he should not avail cenvat credit of duty on inputs and pay duty on final products. (CBEC circular No 306/22/97 dated 20/3/1997 parallel Pune Commissionerate T.N. 44/97 dated 15/4/1997.
* Situation 4 where company itself purchases parts coats and then sells them this is a pure manufacture and sale hence company can avail cenvat credit on CVD , Edn Cess and SHE Cess and cenvat credit on inputs service tax credit on inputs and then clear the goods after charging of excise duty and VAT ( the classification to be checked for rate VAT will be %).
This activity amounts to WCT under MVAT Act (as we are painting or coating and paint is purchase by us.).
There are two options available.
I ) Under rule 58 of MVAT standard deduction of 20% of contract value. On balance 80% MVAT 12.5% (main input rate of tax ) is to charged. In this case we will get full input tax set off on purchases with in Maharashtra.
II) We can go for WCT composition @8% on contract value. Here set off will be only 64%.