Job Work under Central Excise

[C.A. Surender Gupta]

Majumder Committee has submitted its report and recommendation on job work valuation with the intention to plug the duty name of job work.

The recommendations, if implemented by the Central Government, would have long lasting effect on the entire structure of Central Excise. It seems that these recommendations are more pro to generation of unwanted litigation and would incur loss of sources and revenue due to such litigations. Due to these recommendations, it is must that various types of problems are bound to be faced by the trade and would result into demoralizing the small scale manufacturing units.

Every body knows that if the existing provisions of Central Excise Law are implemented effectively and efficiently, the leakage in revenue can be ploughed. The purpose of the recommendations made by the Manjumder Committee has been lost in between, and instead of addressing the major problems and difficulties being faced by the manufacturer and department both, it has ended by recommending the various fruitless changes in the legislation which are prone to generate more unemployment.

The author of this article has tried to focus on various issues related to these recommendations under the following sub categories: -

1  An overview of recommendations made by Majumder Committee

2 Effects of the above recommendations

3 The areas which was not address by the Majumder Committee

4 Suggestions

1  An overview of the recommendations made by the Majumder Committee

Let us have a look on the legislative changes proposed by the Majumder Committee

1.1 Insertion of new clause in the Section 2(f) of the Central Excise Act, 1944 so as to bring the principal manufacturer and job worker explicitly under the purview of 'manufacturer'.

In Section 2(f) after the definition of "manufacture", the words "and the word "manufacturer" shall be construed manufacturer on his own account" shall be deleted and substituted as follows:

"and the word "manufacturer" shall be construed accordingly and shall include -

(i) a person who employs hired labour in the production or manufacture of the excisable goods;

(ii) a person who engages in the production or manufacture of excisable goods on his own account;

(iii) a job worker who is engaged in the production or manufacture of excisable goods on account of another person including principal manufacturer; or

(iv) a principal manufacturer who gets the excisable goods produced or manufactured by another person including job worker."

1.2 Insertion to new sub clause to Section 4(3)(b) in the definition of related person  Amendment of Section (3)(b) ibid by way of expanding the definition of "related person". After insertion, Section 4(3)(b) would be read as under: -

(b) persons shall be deemed to be "related" if -

(i) they are inter-connected undertakings;

(ii) they are relatives;

(iii) amongst them the buyer is a relative and a distributor of the assessee, or a sub-distributor of such distributor;

(iv) they are so associated that they have interest, directly or indirectly, in the business of each other; or

(v) they are job worker and principal manufacturer as defined in Section 2(f) of the Act.

1.3 Insertion of a new Rule in the form of Rule 8A in the Central Excise Valuation (Determination of price of Excisable Goods) Rules, 2000.

Rule 8A:- Where the excisable goods are manufactured for or on behalf of other persons, including a principal manufacturer, and the excisable goods are not sold by the assessee, including a job worker, at the time and place of removal but are transferred to any other place (hereinafter referred to as 'such other place') from where the excisable goods are sold, the value shall be the transaction value of such goods sold from such other place at or about the same time, and where such goods are not sold at or about the same time, at the time nearest to the time of removal of goods under assessment, and where the goods are not sold but consumed at such other place, the value shall be one hundred and ten percent of the cost of production or manufacture of such goods.

2 Effects of the recommendations

The proposed changes as above, are unimportant and a short of old wine in a new bottle. Let us have a look of the effects and necessity of these changes: -

2.1 Proposed changes in the definition of manufacture

The Majumder Committee has recommend the changes in the definition of Section 2(f) - Meaning of Manufacture.

As we know, the existing definition of manufacture provided in the section 2(f) is wide enough and till today nobody is in a position to define the absolute meaning and scope of the term "Manufacture". The term manufacture has been defined by the honorable Supreme Court India in number of cases in different circumstances. The definition given by the supreme court also indicates specifically that the concept of ownership is not a relevant issue for deciding manufacture and applicability of Excise Duty on such manufacture. If any person is engaged in some activity / process and such activity or process is resulting into an emergence of a new substance which has its own identity and recognition independent to the original goods, it shall be amount to manufacture with in the meaning of Section 2(f) of the Act.

Therefore the recommendation for change in section 2(f) shall not serve any purpose. The situation would remain as same as earlier.

2.2  Proposed changes in the definition of "related persons"

The Manjumder Committee has recommended the changes in the definition of "related person". If we see the existence definition of "related person", we would find that this term covers the two or more units which are related with each other by ownership or on the basis of managerial or financial contribution or dependence of one unit upon another unit.

But, it is strange to see that the recommendations seek to extent the term "related person" to an independent unrelated person with in its scope.

Instead of recommending for increasing the scope of "related person" must have recognized that a job worker never sale the goods to its principal. Job worker merely raise the bill on the principle for its job work charges and value of material utilized by him in the job working activity. Since there is no sale, the clause (b) of section 4(1) take care of circumstances. Where the goods are not sold, it refers to the valuation rules directly.

Since, existing provision of section 4 of the act is sufficient to refer the valuation issue to the valuation rules, there is no need to amend the term "related person" to include "job worker".

2.3  Proposed insertion of rule 8A in the valuation rules

The author agrees that even if the existing provision of section 4 refers to the Valuation Rules in case goods are not sold or price is not the sole consideration, there is no independent provision or rule in existence for valuation in case of job work. Till now valuation of job work is done in accordance with the decision of honorable Supreme Court in the matter of Ujagar Prints v. UOI 38 ELT 535 = AIR 1989 SC 516 401.

This is the first time, when a separate rule for valuation of goods manufactured by the job worker is proposed. Indeed it is a welcome step but contain the inherent limitations.

As per the recommendation, in case of job work, the value shall be the sale price of such goods. But this rule 8A fails to address the following issues for proper implementation of this rule and therefore would create more difficulties and confusions:

a) In case of job work there is no sale by job worker. Only the principle is supposed to sale the goods manufactured by the job worker. In such situation, the job worker is heavily dependent on the information provided by the principle.

b) Where the information provided by the principle is wrong, who would be responsible.

c) If the principle is required to disclose its sale price to the job worker, he would prefer to manufacture the goods on its own instead of get them manufactured through job worker.

d) Since the job workers in majority of cases, are very small, would not get the business from the principles because of the reason mentioned above, it would result into generation of unemployment.

3 Issues which are not addressed by the Majumder Commettee

The following which are of immense importance but not dealt with by the Majumder Committee:

3.1  Definition of job work: -

There is no definition of job work in the Central Excise or Rule made thereunder except in "Cenvat Credit Rules, 2004". Rule 2(n) of the Cenvat Credit Rules, 2004 defines the term "job work", if such definition is extended to the proposed changes, it would create more problems because in such circumstances, mere a process which is not a "Manufacturing Activity" would be termed as manufacture.

3.2  How to get the correct value from the principle

There is no mechanism which has been recommended by the Manjumder Committee about how to implement the recommendations. If the information is not provided or incorrect information is provided, who will be held guilty and from whom the differential duty would be recovered.

3.3  Where the goods sold by the principle through its deport or branches etc.

In case the job worker is supplying the goods to the principle who in terms transfers the same to its various depots or branches, how and in what manner the job worker has to keep records in support of correct value of such goods

3.4  Value addition by the principle

Where job worker supplies the goods to principle and the same is used as captive consumption by the principle, it is recommended that value shall be cost of production plus ten percent.

But it fails to address the issues where the principle, just make some value addition to such goods procured from the job worker, and such value addition is not amount to manufacture and not treated as captive consumption, what should be value for the purpose of excise duty.

4 Suggestions

4.1  The definition of "Job Work" should be introduced in the Central Excise Act, 1944 itself.

4.2  No need to change the definition of "Manufacture" under section 2(f).

4.3  No need to change the definition of "related person" under section 4(3)(b)

4.4  Introduction of a set of fresh valuation rules or sub rules for "Valuation of goods in case of Job Work" addressing the problems discussed above and other relevant issues.