APRIL 20, 2012

By CA Pradeep Jain, CA Preeti Parihar and Sukhvinder Kaur

LEARNING from the lacunas in the existing law and making new provisions accordingly is a sign of progressive approach of the law makers. Our government seems to have inspired from this as proved by the provisions relating to service tax on process undertaken by the job worker in the proposed scheme of negative list. This piece of articulation deals with the existing provisions as well as the proposed ones relating to Service tax on the process undertaken by the job workers.

Exemption from Service Tax under BAS: -

At present, any person producing or processing the goods on behalf of any other person is covered under the head of “Business Auxiliary Services” and is liable to pay the service tax. However, if the process carried on by the job worker amounts to manufacture, he is exempt from paying the service tax. The definition of Business Auxiliary Service under the Finance Act, 1994 is reproduced as follows:-

(19) "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

Explanation.- For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, “service in relation to promotion or marketing of service provided by the client” includes any service provided in relation to promotion or marketing of games of chance, organised, conducted or promoted by the client, in whatever form or by whatever name called, whether or not conducted online, including lottery, lotto, bingo;

(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

Explanation.-For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, "inputs" means all goods or services intended for use by the client,

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

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

(vii) a service incidental or auxiliary to any activity specified in 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 activity that amounts to manufacture of excisable goods.

Explanation.-For the removal of doubts, it is hereby declared that for the purposes of this clause,-

(a) "commission agent" means any person who acts on behalf of another person and causes sale or purchase of goods, or provision or receipt of services, for a consideration, and includes any person who, while acting on behalf of another person-

(i) deals with goods or services or documents of title to such goods or services; or

(ii) collects payment of sale price of such goods or services; or

(iii) guarantees for collection or payment for such goods or services; or

(iv) undertakes any activities relating to such sale or purchase of such goods or services;

(b) “excisable goods” has the meaning assigned to it in clause (d) of section 2 of the Central Excise Act, 1944;

(c) “manufacture” has the meaning assigned to it in clause (f) of section 2 of the Central Excise Act, 1944;

A perusal of the definition provides that under the Business Auxiliary Service, the production or processing of goods on behalf of the client is not covered if the activity that amounts to manufacture of excisable goods. The meaning of “excisable goods” is said to have the same meaning as assigned to in clause (d) of section 2 of the Central Excise Act, 1944 and “manufacture” has the meaning assigned to it in clause (f) of section 2 of the Central Excise Act, 1944;

Position under Other Services: -

The exclusion as given under BAS, however, is not given in any other category of service. Therefore for other services until and unless a clarification is given by the Board, the assessee has to pay service tax on the process undertaken by him. While under BAS service, the exclusion is specifically and elaborately provided to avoid ambiguity.

Recently, the AP Tyre Retreaders Association had requested the Department not to charge service tax on re-treading of tyres under ‘Management, Maintenance & Repair Service on the ground that ‘retreading of tyre' is specifically figuring in Central Excise Tariff under Tariff heading 4012 and therefore, they are excisable goods and hence service tax could not be imposed as Excise duty was payable.

However, the Board followed the reasoning that merely because the goods are barely mentioned in the Central Excise Tariff Act then, though they would qualify as ‘excisable goods', however, for the central excise duty to come into operation, as per Section 3 of the CEA, the additional requirement of these goods have been produced or manufactured in India would also have to be satisfied. Hence, the Board clarified that -

“retreading of tyres is covered under the ambit of the service ‘Management, Maintenance & Repair Service' and is liable to payment of service tax.”

Thus, apart from BAS, if the category of service covers an activity amounting to manufacture then until is it specifically clarified, service tax will be leviable on such process and service tax will be payable.

Advent of Negative List: -

Under the existing Finance Act, 1994 the service tax is levied on 119 services which have been listed in Section 65 and various exemptions, exceptions are existing. However, with Budget, 2012-13, the proposal is made to introduce Negative list of services. In the negative list there are certain services listed will be outside the purview of service tax net. And service tax will be levied on all the other services. Thus, many of the exceptions and exemptions created in the present positive list will become ineffectual. Same will happen to the exception given in the definition of BAS. Since the categories of services in current system will abolish, the definition of BAS will also become redundant. However, under the proposed negative list of services, the issue is taken care of and specific exemption has been provided to the job worker under the mega exemption notification vide serial no. 30. The said provisions read as under:

30. Carrying out an intermediate production process as job work in relation to:–

(a) agriculture, printing or textile processing;

(b) cut and polished diamonds and gemstones; or plain and studded jewellery of gold and other precious metals, falling under Chapter 71 of the Central Excise Tariff Act ,1985 (5 of 1986);

(c) any goods on which appropriate duty is payable by the principal manufacturer; or

(d) processes of electroplating, zinc plating, anodizing, heat treatment, powder coating, painting including spray painting or auto black, during the course of manufacture of parts of cycles or sewing machines upto an aggregate value of taxable service of the specified processes of one hundred and fifty lakh rupees in a financial year subject to the condition that such aggregate value had not exceeded one hundred and fifty lakh rupees during the preceding financial year;

Further, the proposed definition of “principal manufacturer” given is that

“principal manufacturer” means any person who gets goods manufactured or processed on his account from another person,

The conclusion which can be inferred from the proposed provisions is as under:

• The exemption is available if the job worker is carrying out an intermediate production process.

• The goods should be those on which appropriate duty of excise is payable by the principal manufacturer.

Existing v/s proposed scheme:-

•  Under negative list, the exemption from Service tax is provided to job worker only if he is engaged in any activity which amounts to manufacture. However, if the activity does not amounts to manufacture, service tax would be payable subject to certain exceptions as given in other clauses of serial no. 30 of the mega exemption notification no. 12/2012-ST dated 17.3.2012. These clauses include the processes in relation to textiles, agriculture and printing, cut and polished gems, diamonds and jewellery as described in clause (b) and certain specified processes like electroplating, zinc plating, anodizing, etc. as mentioned in clause (d) of said serial no. 30. Thus, all the other processes that do not amount to manufacture will be chargeable to service tax. This is slight different than as it is there in the present system, where service tax is surely payable if the process does not amount to manufacture. However, service tax is still payable under certain other heads even if the process amounts to manufacture.

•  At present, exception is given only in Business Auxiliary Service to the job worker who undertakes any process that amounts to manufacture. Under all other heads of taxable services, even if the process amounts to manufacture; the service provider is liable to pay the service tax. For example, the job work for repairing of goods is chargeable to service tax under the category of “Management, maintenance and repairing” service. Further, under BAS, the service tax exemption is available when the activity amounts to “manufacture”. It is not mentioned specifically that the excise duty should be payable. Thus, even if the excisable goods are subject to excise duty exemption; then too, the service tax exemption is available under BAS. However, under the proposed negative list, the exemption is provided to the job workers if the goods manufactured by them are those on which duty is payable by the principal manufacturer. Thus, it is specifically provided that the duty is payable by the principal manufacturer. The language used here implies that if the duty is not payable by the principal manufacturer by virtue of any exemption notification, then service tax would be payable. But this is not so; as clarified by the TRU in its guidance note no. 4. The relevant para 4.6.2 reads as follows:-

“4.6.2 Would service tax be leviable on processes on which Central Excise Duty is leviable under the Central Excise Act, 1944 but otherwise exempted?

No, 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.”

As such, though the language of exemption has been altered while switching from positive list to negative list; yet the spirit has been kept as such.

•  Under the present scheme of service tax by positive list, exemption is available under BAS if the process amounts to ‘manufacture' as defined in clause (f) of section 2 of the Central Excise Act, 1944. However, in the proposed scheme of negative list, the phrase “processes amounting to manufacture or production of goods' is 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 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 has been clarified at para no. 4.6 of the guidance note no. 4 issued by TRU. Thus, under proposed scheme, the area of this exemption has been widened.

While parting:-

The proposals made in the service tax by way of negative list regarding the job work for processes amounting to manufacture are a well come step. The government has learnt from the lacunas that are there in the existing scheme of service tax by way of positive list. It seems that government is learning lessons and implementing them in order to smoothen the way to GST.