Leasing and Job Work, Goods and Services Tax - GST

[HNA CharteredAccountants]

1. M/s A has given on lease factory consisting of land, buildings, plant and machinery, and other infrastructure situated on land to M/s Y on payment of monthly rent of Rs. 5 Lakh. The workers and other staff employed by M/s A have not been transferred to M/s Y. They continue to be employed by M/s A.

2. M/s Y has declared the said premises as an additional place of business in their GST registration and M/s Y has employed M/s Z as works managers as overall in charge of activity carried out at above factors. M/s Y has procured raw material for manufacture of product X classifiable under Chapter 62.

3. M/s Y has paid M/s A monthly rent of Rs. 5 Lakh plus the amount of salaries and wages for the workers and other staff employed by M/s A.

4. M/s A has approached you for advising on compliance with GST provision and requested for opinion on the following issues.

(a) Will the activity of M/s A be considered as job work as input procured by M/s Y is processed by utilizing plant and Machinery and workers?

(b) Will the answer be different if RM is procured by M/s A directly and reimbursement of amount is claimed by raising tax invoice on M/s Y?

(c) If not where the activity of M/s A will be classified?

(d) Will your answer be different if consideration of M/s A is based on the quantity of final product manufactured at the above factory with the minimum guarantee amount of Rs. 2 lakhs per month?

(d1) Should the rent amount received by M/s A be added to the job work charges received by M/s Y?

(e) Will M/s A be entitled for the credit on various expenses like security providing, bus services to the employee and other expenses incurred on employees by M/s A?

Posts / Replies

[YAGAY andSUN]

This case involves the lease of a manufacturing facility (including plant, machinery, and infrastructure) by M/s A to M/s Y, while employees of M/s A are still being paid by A, and M/s Y uses the premises for manufacturing using its own raw materials. Below is the issue-wise analysis under GST:

(a) Will the activity of M/s A be considered as job work?

Answer: No, the activity of M/s A is not job work.

Reason:

As per Section 2(68) of the CGST Act, “Job work” means any treatment or process undertaken by a person on goods belonging to another registered person.”

• In this case, M/s A is not undertaking any treatment or process on behalf of M/s Y.
• M/s Y is carrying out the manufacturing using the premises and staff leased by M/s A.
• Ownership of goods remains with M/s Y, and it is M/s Y who employs works managers and manages the operations.

Hence, M/s A is not performing any job work, but only leasing the premises, infrastructure, and staff services.

(b) Will the answer be different if raw materials are procured by M/s A directly and reimbursement is claimed from M/s Y?

Answer: No, the answer remains the same.

• Merely procuring raw materials on behalf of another person and claiming reimbursement does not change the principal nature of the activity.
• M/s Y still owns the final product and has declared the factory as their place of business.
• M/s A is still not undertaking the activity of manufacturing; it only facilitates it.

Thus, the activity still does not qualify as job work.

(c) If not, how will the activity of M/s A be classified?

Answer: The activities of M/s A will be classified as a supply of services, including:

1. Lease/Rental of immovable property – under SAC 997212 (renting of commercial or industrial premises).
2. Manpower supply or support services – if the salaries and wages of staff provided are reimbursed, could be deemed as manpower supply services, under SAC 998513 or 998514.

In totality, this is a composite or mixed supply depending on contractual terms, but not job work.

(d) Will your answer be different if consideration is based on quantity of final product manufactured with a minimum guarantee of Rs. 2 lakhs per month?

Answer: No, this will not change the nature of supply.

• Changing the basis of consideration (i.e., performance-linked instead of fixed rent) does not alter the substance of the transaction.
• M/s A is still not undertaking the manufacturing themselves.
• Unless M/s A actively engages in processing goods, it remains a lease/service arrangement.

(d1) Should the rent amount received by M/s A be added to the job work charges received by M/s Y?

Answer: No.

• M/s A and M/s Y are two different entities.
• There is no job work carried out by M/s Y; rather, M/s Y is the manufacturer.
• Rent received by M/s A is their own outward supply of service.
• No aggregation is needed, as these are separate supplies by separate taxable persons.

(e) Is M/s A entitled to ITC on expenses like security, bus services, and other employee-related expenses?

Answer: ITC eligibility is limited based on certain conditions:

1. Security services – Eligible, as these are directly used in the course of business.
2. Bus transportation services – Blocked credit under Section 17(5)(b)(i) unless:
   • The service is mandated under law, or
   • It is provided to all employees and not restricted to a class.
3. Employee-related expenses (canteen, insurance, etc.) – Also blocked, unless:
   • It is obligatory under any law, e.g., Factories Act.
   • Provided uniformly and not as a perquisite.

M/s A must maintain proper documentation and ensure compliance with statutory obligations to avail ITC on such expenses.

Summary of Key Points

Issue	Response
Job work status of M/s A	No, it is not job work
Change if M/s A procures RM	No change
Classification of activity	Supply of leasing + manpower/support services
Consideration based on output	Still not job work
Rent + job work charges aggregation	Not required
ITC on employee-related expenses	Partially allowed – subject to Sec. 17(5) conditions

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[YAGAY andSUN]

Here's a professional draft of the GST opinion letter for M/s A based on the analysis provided:

[On Company Letterhead]

Date: [Insert Date]

To,

M/s A

[Address]

Subject: Opinion on GST Compliance Relating to Leasing of Factory Premises and Associated Activities

Dear Sir/Madam,

We refer to your query regarding the Goods and Services Tax (GST) implications on the activities undertaken by M/s A concerning the lease of factory premises, plant and machinery, and provision of workers to M/s Y for carrying out manufacturing activities.

Based on the facts provided and documents reviewed, our opinion on the GST treatment is as under:

1. Nature of Activity and Classification

You have leased factory premises, plant and machinery, and infrastructure to M/s Y, who is undertaking the manufacturing activity at the said premises using its own raw materials and employed works managers. The workers and other staff remain employed and paid by M/s A.

• The activity of M/s A does not qualify as job work under GST, as M/s A is not undertaking any treatment or process on goods belonging to M/s Y.
• Instead, the activity constitutes a supply of services comprising:
  • Lease/rent of immovable property (factory premises and infrastructure) – classified under SAC 997212.
  • Provision of manpower and related services (salaries and wages of staff employed by M/s A) – classified under SAC 998513/998514 or applicable manpower supply service codes.

2. Effect of Raw Material Procurement

Even if M/s A procures raw materials directly and claims reimbursement from M/s Y, it does not alter the nature of the supply. The arrangement will continue to be a service supply and not job work.

3. Consideration Structure

If consideration payable to M/s A is linked to the quantity of finished products manufactured, with a minimum guarantee amount, the GST classification will remain unchanged. The change in consideration basis does not convert the supply into job work or any other category.

4. Aggregation of Rent and Charges

The rent received by M/s A cannot be combined with any job work charges, as M/s A is not performing job work, and these are two separate supplies. Hence, there is no requirement to aggregate rent with job work charges for GST purposes.

5. Input Tax Credit (ITC) on Expenses

M/s A will be entitled to claim ITC on expenses such as security services and other costs directly related to the leasing business, subject to normal conditions and restrictions under the GST law.

However, ITC on bus services for employees and other employee welfare expenses may be restricted under Section 17(5) of the CGST Act unless they meet specified conditions or are mandated by law.

Conclusion

Accordingly, we advise that M/s A should:

• Treat the supply as a service of leasing immovable property and manpower supply.
• Charge GST on the rent and manpower charges accordingly.
• Maintain proper documentation for raw material procurement (if any) and reimbursement.
• Carefully evaluate and claim ITC on expenses as per GST provisions.
• File GST returns reflecting the correct nature of supply and consideration.

Please feel free to reach out for any further clarifications or assistance in GST compliance.

Yours faithfully,

[Your Name]

[Your Designation]

[Your Firm’s Name]

[Contact Details]

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