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Manufacture - The Ever Haunting Term!

JANUARY 20, 2020

By M G Kodandaram, IRS(Retd.)

MY career, from the day one of joining the services, revolved around one simple word 'manufacture'. As a beginner, I first struggled to understand the legally assigned meaning of the said term 'Manufacture', especially with reference to Central Excises and Salt Act, 1944, which later got shortened as Central Excises Act, 1944. The taxable event for the purposes of levy of Central Excise duty has been 'the manufacture of Excisable Goods' and, therefore, 'What amounts to manufacture?' haunted my understanding all the time. The honourable courts in their voluminous judgments would pour out the meaning of the said expression in their own versatile manner. By the time I settled down with certain case laws, the ever frequent alteration brought about in the law would aggravate the situation, by rubbing salt to my understandings. Such incursions into settled issues in the form of amendments added or modified or replaced some portion of the definition, which took a beating to the earlier assigned meaning, making me start all over again. The circulars issued from time to time by the department on the said word were a nightmare as they, instead of clearing the doubts, increased the confusion in the minds of every executive. The term 'manufacture' became such an important and powerful phrase during the Central Excise regime that it found its entry into almost every Chapter of the Central Excise Tariff. However the meaning of the said word in the Act viz., Section 2(f) remained ever elusive to me, regardless the courts spending reams of paper to make us understand what the term 'manufacture' is all about.

However the herald of the GST regime brought some relief to all of us, as the taxable event got expanded and changed as "Supply of Goods or Services or both". The word 'manufacture' found no place in the taxable event as it was kicked out by the term 'Supply' which now leads the GST regime. However my fortune was short lived, as I chanced upon the term "manufacture" again in the CGST Act, 2017. As per the Section 2 (72) of the CGST Act, "manufacture" means processing of raw material or inputs in any manner that results in emergence of a new product having a distinct name, character and use and the term "manufacturer" "shall be construed accordingly." On my further exploration as to find out the purpose of defining the said term, I landed upon Section 147 of the CGST Act, 2017, which used the said word to define 'Deemed Exports' under GST Laws. The provisions relating to Deemed Exports viz., Section 147 read as follows: "The Government may, on the recommendations of the Council, notify certain supplies of goods as Deemed Exports, where goods supplied do not leave India, and payment for such supplies is received either in Indian rupees or in convertible foreign exchange, if such goods are manufactured in India." Again I started my ever green jaunt to find out the meaning of the said word used in deciding the eligibility as to 'Whether a certain Supply is a Deemed Export or otherwise'?

The origin of statutes covering international trade begins with Central Government notifying and announcing the Foreign Trade Policy [FTP] as empowered under Section 5 of FTDR Act. The chapter 7 of FTP 2015- 20, with effect from 5.12.2017 recorded the objective for providing Deemed Export measures as, "to provide a level-playing field to domestic manufacturers in certain specified cases, as may be decided by the Government from time to time. "The Para 7.01 stated that the "Deemed Exports" for the purpose of this FTP refer to those transactions in which goods supplied do not leave country, and payment for such supplies is received either in Indian rupees or in free foreign exchange. It further added that the Supply of goods as specified in Paragraph 7.02 shall be regarded as "Deemed Exports", provided goods are manufactured in India. The said Para further mandated that "Deemed Exports" for the purpose of GST would include only the supplies notified under Section 147 of the CGST/SGST Act, on the recommendations of the GST Council. The benefits of GST and conditions applicable for such benefits would be as specified by the GST Council and as per relevant rules and notification.

Please note the word 'manufacture' appearing and haunting me again.

The term 'manufacture' and 'manufacturer' have been defined in the section 9 of the FTP as follows: "Para 9.31 "Manufacture" means to make, produce, fabricate, assemble, process or bring into existence, by hand or by machine, a new product having a distinctive name, character or use and shall include processes such as refrigeration, re-packing, polishing, labeling, Re-conditioning repair, remaking, refurbishing, testing, calibration, re-engineering. Manufacture, for the purpose of FTP, shall also include agriculture, aquaculture, animal husbandry, floriculture, horticulture, pisciculture, poultry, sericulture, viticulture and mining. "And " Para 9.32 "Manufacturer Exporter" means a person who exports goods manufactured by him or intends to export such goods."

As detailed above, the definition of 'manufacture' in the FTP covers a broader range of products and processes than the one prescribed in CGST Act.

In the FTP, "Manufacture" means to make, produce, fabricate, assemble, process or bring into existence, by hand or by machine, a new product having a distinctive name, character or use and shall include processes such as refrigeration, re-packing, polishing, labeling, Re-conditioning repair, remaking, refurbishing, testing, calibration, re-engineering. Manufacture, for the purpose of FTP, shall also include agriculture, aquaculture, animal husbandry, floriculture, horticulture, pisciculture, poultry, sericulture, viticulture and mining. The same has been narrowed down in CGST Act to mean, "processing of raw material or inputs in any manner that results in emergence of a new product having a distinct name, character and use and the term "manufacturer" shall be construed accordingly. 'Whether the processes such as refrigeration, re-packing, polishing, labeling, Re-conditioning repair, remaking, refurbishing, testing, calibration, re-engineering could amount to manufacture under CGST Act is the issue that appears to be litigation prone. If such processes are done on goods belonging to the recipient, under GST Laws, it amounts to supply of services, which are kept out of the stated 'Deemed Export' provisions. Also products and processes relating to 'agriculture, aquaculture, animal husbandry, floriculture, horticulture, pisciculture, poultry, sericulture, viticulture and mining' amounts to Deemed Export is also contentious matter in view of the narrower definition in the CGST Act and may not include produced farm goods in primary form. There are conflicts and contradictions that could start a galore of litigation between GST Law vis-à-vis Foreign Trade Policies and make all stakeholders lose both the Cost and time. Therefore, there is immediate need to harmonise the provisions of FTP with that of GST Laws. Public money, as usual, gets squandered on futile matters.

There are similar contradictions between FTP, Customs and GST law which needs to be amended so as to avoid litigations. Therefore, it is brought to the notice of the authorities concerned to initiate remedial action to harmonise the Deemed Export provisions in GST Law with those provisions in the FTP in a fair and equitable manner, so that litigations based on the definition of the term 'manufacture' could be averted. Hope the champion draftsmen of the Government look into such issues and relieve us from recurrence of haunting!

(The author is Assistant Director, NACIN (Retd), ADVOCATE and CONSULTANT. The views expressed are strictly personal.)

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