PROCESS AMOUNTING TO MANUFACTURE OR PRODUCTION OF GOODS IN SERVICE TAX

[Dr. Sanjiv Agarwal]

As per (Clause 40) of Section 65B of the Finance Act, 1994, "process amounting to  manufacture or production of goods" means a process on which duties of excise are leviable under section 3 of the Central Excise Act, 1944 or any process amounting to manufacture of alcoholic liquors for human consumption, opium, Indian hemp and other narcotic drugs and narcotics on which duties of excise are leviable under any State Act for the time being in force.

In the above definition, processes under the medicinal and Toilet preparations (Excise Duties) Act, 1955 have been included w.e.f. 10-5-2013.

Earlier, there was no such definition but 'manufacture' was defined to mean the same as per section 2(f) of Central Excise Act, 1944.

The definition applies to any process which amounts to both, manufacture of goods or production of goods which implies that there will be difference between 'production' and 'processing' and both are used in juxtaposition.

It implies -

1. any process
2. process a which excise duty is tenable under section 3 of Central Excise Act, 1944, or
3. any process amounting to manufacture of alcoholic liquor meant for humor consumption/ opium/Indian hemp/other narcotic drugs.
4. any process amounting to manufacture of narcotic on which excise duty is leviable under any State Act.

According to TRU clarification dated 16.03.2012, the phrase 'processes amounting to manufacture or production of goods' has been defined in section 65B of the Act as a process on which duties of excise are leviable under section 3 of the Central Excise Act, 1944 (1 of 1944) or any process amounting to manufacture of alcoholic liquors for human consumption, opium, Indian hemp and other narcotic drugs and narcotics on which duties of excise are leviable under any State Act. This entry, therefore, covers manufacturing activity carried out on contract or job work basis provided duties of excise are leviable on such processes under the Central Excise Act, 1944 or any of the State Acts.

Service tax would be levied on processes, unless otherwise specified in the negative list, not amounting to manufacture or production of goods carried out by a person for another for consideration. Some of such services relating to processes not amounting to manufacture are exempt under Notification No. 25/2012-ST dated 20-6-2012 (entry No. 30).

If Central Excise duty is leviable on a particular process, as the same amounts to manufacture, then such process would be covered in the negative list even if there is a central excise duty exemption for such process. However if central excise duty is wrongly paid on a certain process which does not amount to manufacture, with or without an intended benefit, it will not save the process on this ground.

Section 3 of Central Excise Act, 1944 reads as follows -

"Duties specified in First Schedule and the Second Schedule to the Central Excise Tariff Act, 1985 to be levied. -

(1)    There shall be levied and collected in such manner as may be prescribed, -

1. a duty of excise to be called the Central Value Added Tax (CENVAT)] on all excisable goods (excluding goods produced or manufactured in special economic zones) which are produced or manufactured in India as, and at the rates, set forth in the First Schedule to the Central Excise Tariff Act, 1985 (5 of 1986);
2. a special duty of excise, in addition to the duty of excise specified in clause (a) above, on excisable goods excluding goods produced or manufactured in special economic zones specified in the Second Schedule to the Central Excise Tariff Act, 1985 (5 of 1986) which are produced or manufactured in India, as, and at the rates, set forth in the said Second Schedule.

Provided that the duties of excise which shall be levied and collected on any excisable goods which are produced or manufactured, -

1. Omitted.
2. by a hundred per cent export-oriented undertaking and brought to any other place in India, shall be an amount equal to the aggregate of the duties of customs which would be leviable under the Customs Act, 1962 (52 of 1962) or any other law for the time being in force, on like goods produced or manufactured outside India if imported into India, and where the said duties of customs are chargeable by reference to their value; the value of such excisable goods shall, notwithstanding anything contained in any other provision of this Act, be determined in accordance with the provisions of the Customs Act, 1962 (52 of 1962) and the Customs Tariff Act, 1975 (51 of 1975).

Explanation 1. - Where in respect of any such like goods, any duty of customs leviable for the time being in force is leviable at different rates, then, such duty shall, for the purposes of this proviso, be deemed to be leviable at the highest of those rates.

Explanation 2. - In this proviso, -

1. Omitted.
2. "hundred per cent export-oriented undertaking" means an undertaking which has been approved as a hundred per cent export-oriented undertaking by the

Board appointed in this behalf by the Central Government in exercise of the powers conferred by section 14 of the Industries (Development and Regulation) Act, 1951 (65 of 1951), and the rules made under that Act.;

3. "Special Economic Zone" has the meaning assigned to it in clause (za) of section 2 of the Special Economic Zones Act, 2005 (28 of 2005).

(1A) The provisions of sub-section (1) shall apply in respect of all excisable goods other than salt which are produced or manufactured in India by, or on behalf of, Government, as they apply in respect of goods which are not produced or manufactured by Government.

2. The Central Government may, by notification in the Official Gazette, fix, for the purpose of levying the said duties, tariff values of any articles enumerated, either specifically or under general headings, in the First Schedule and the Second Schedule to the Central Excise Tariff Act, 1985 (5 of 1986) as chargeable with duty ad valorem and may alter any tariff values for the time being in force.

3. Different tariff values may be fixed -

1. for different classes or descriptions of the same excisable goods; or
2. for excisable goods of the same class or description -

1. produced or manufactured by different classes of producers or manufacturers; or
2. sold to different classes of buyers :

Provided that in fixing different tariff values in respect of excisable goods falling under sub-clause (i) or sub-clause (ii), regard shall be had to the sale prices charged by the different classes of producers or manufacturers or, as the case may be, the normal practice of the wholesale trade in such goods".

To attract excise duty under section 3 of the Central Excise Act, the article must satisfy the twin attributes of excisable goods- mobility and marketability - or it should find a place by that name in the Schedule to the Act; Commissioner of Central Excise, Mumbai v. Josts Engineering Co. Ltd 2002 (8) TMI 107 - SUPREME COURT OF INDIA.

The expression duty of excise is limited in its connotation only to basic duty of excise levied under the Act or it also covers special duty of excise levied under various Finance Bills and Acts, additional duty of excise levied under the Additional Duty of Excise (Goods of Special Importance) Act, 1957 and any other kind of duty of excise levied under a central enactment; Union of India v. Modi Rubber Limited, 1986 (8) TMI 60 - SUPREME COURT OF INDIA

Prior to Finance Act, 2012 amendment, 'production or processing of goods for, or on behalf of, client, was taxable under clause (v) of section 65(19) under business auxiliary services.

Amendment made by Finance Act, 2013 (w.e.f. 10.05.2013)

Finance Act, 2013 has amended clause (40) of section 65B so as to include processes covered under "The Medicinal and Toilet Preparations (Excise Duties), Act 1955' alongwith Central Excise Act, 1944. Thus, w.e.f. 10.05.2013, definition of 'process amounting to manufacture or production of goods' has been amended to include processes on which duties of excise are leviable under the Medicinal and Toilet Preparation (Excise Duties) Act, 1955. With this, processes of manufacture of Medicines, perfumes, deodorants, tooth pastes, toilet soaps etc. shall also be covered in the negative list.