Contract Manufacturing And Job Work Operations

Job-work industry constitutes a significant sector in the Indian economy. It is an indispensable arm of our industrial sector. “Job work” includes outsourced activities which may or may not result into manufacture. The person undertaking the job work is called job worker. The job worker works under the instructions of the principal manufacturer and exercises his labour over the inputs or material belonging to his principal. Where exercise of labour results in manufacture of goods, excise duty becomes applicable and in other cases, service tax comes into play. Some job works involve transfer of material from job-worker to principal manufacturer in the course of execution of the work in which case VAT/CST may get attracted. In some cases, a job worker provides pure labour and entire inputs/ raw materials are provided by the principal manufacturer.

Job-Work and Existing Law

The context of Central Excise Act, the Hon’ble Supreme Court in the case of Ujagar Prints, etc. vs UOI 1988 (38) ELT 535 had held that, the assessable value of the goods in the hands of job-worker, would include value of the goods supplied to the job-worker for processing plus the value of the job-work done plus manufacturing profits and manufacturing expenses whatever would be included in the price at the factory gate but not any other subsequent profit or expenses. Subsequently, Rule 10A was inserted in the Central Excise Valuation whereby, transaction value of the goods processed by the job-worker was amended to also include profits of the principal manufacturers (i.e. transaction value of the goods sold by the principal manufacturer at the time of removal of goods from the factory). The job work operations not amounting to manufacture would be regarded as service. The job-work processing charges charged by the job-worker to principal manufacturer would attract service tax. This would include price of the raw material, labour and processing charges. The raw material supplied by the Principal manufacturer free of charge may not form the part of value of taxable services.

Job-Work and GST

Under the GST regime, the term “job work” is defined in section 2(68) to mean any treatment or process undertaken by a person on goods belonging to another registered person and the expression “job worker” shall be construed accordingly. Contract manufacturing is not strictly same as job-work as in that case, contract manufacturer uses his own material. The principal manufacturer only affixes his label and sells the product. Therefore, ‘contract manufacturing’ would not be considered as job-work. Distinction between contract manufacturer and job-worker would be relevant in GST since transaction between principal manufacturer and job-worker has been given special treatment in GST Law.Various provisions concerning job-work transactions are discussed in this Article.

Whether supply of goods from Principal to Job-work would attract GST if provisions of section 143 are ignored?

Section 143 of the GST Act, makes special provisions for transactions between manufacturer and job worker. It provides that, a registered person (say principal manufacturer) may send any inputs or capital goods to a job-worker, without payment of tax on the basis of intimation given to the proper officer and subject to certain conditions. The levy under the GST law is on “supply” of goods and services.

The term supply is wide enough to cover any form of supply such as sale, service, transfer, barter, exchange, licence, rental, lease, disposal etc. However, supply made by one person to another person without consideration would not attract GST [unless the supplier and receiver are related persons]. Hence, author is of the view that, even in the absence of section 143(1), a supply of any goods (inputs, capital goods, consumables, tools, jigs etc.) by a manufacturer to unrelated job-worker would not require payment of tax.

Why scheme under section 143 is required?

Then a question may arise as to whether principal is required to reverse Input Tax Credit (ITC) availed by the manufacturer in respect of such goods supplied to job-worker on the ground that outward movement of such goods to job-worker does not suffer GST. Besides, when the job-worker returns the ‘processed goods’ back to manufacturer and charges job-work processing charges, the question may arise as to whether value of ‘such goods’ for the purpose of GST would include only ‘job work charges’ or ‘transaction value’ of the processed goods.

As regards entitlement of ITC, section 19 provides that the principal (manufacturer sending the raw material etc.) shall, subject to certain conditions and restrictions as may be prescribed, be allowed input tax credit on inputs/ capital goods sent to a job worker for job work. Such conditions and restrictions are contained in Rule 10 of the ITC Rules approved on 17.05.2017 (discussed later). The ITC is allowed, even if the inputs/ capital goods are directly sent to a job worker for job work without being first brought to his place of business. However certain additional conditions are contained in section 19, which makes it necessary for principal and job-worker to avail the benefit of scheme contained in section 143. In other words, benefit of section 19 is available to manufacturer only if he avails the benefit of scheme u/s. 143.

It appears that, intention of section 19(3) and 19(6) is to require the principal to reverse the ITC, if benefit of scheme contained in section 143 requiring the principal to give intimation is not obtained or in case the goods are not received back within stipulated period as per section 143, but that intention is not coming out from the wordings of section 19(3) and 19(6). Section 19 provides that, where the inputs (or capital goods) sent for job work are not received back by the principal after completion of job work or otherwise or are not supplied from the place of business of the job worker in accordance with clause (a) or clause (b) of sub-section (1) of section 143 within one year of inputs (and within three years in case of capital goods) being sent out, it shall be deemed that such inputs/ capital goods had been supplied by the principal to the job worker on the day when the said inputs were sent out. The exception is provided only in respect of moulds and dies, jigs and fixtures, or tools.The use of the expression “it shall be deemed that such inputs had been supplied by the principal to the job worker on the day when the said inputs were sent out” in section 19(3) is a misfit and appears to be a drafting error – copy pasting from provisions of 143(3) and 143(4) of the Act. The suggested correct wordings would be, “the principal shall be liable to pay Input Tax Credit availed on such inputs or capital goods on the date of supply of such goods to job-worker in accordance with provisions contained in section 143(3) and 143(4).”

Thus, going by the spirit of section 19, if the Principal has given/obtained benefit of scheme u/s. 143, he would not be required to reverse the ITC in respect moulds and dies, jigs and fixtures, or tools sent out to a job worker for job work at all, even if he had paid no GST at the time of their supply to the job-worker. As regards inputs and other capital goods, the reversal of ITC is not required at the time of sending such goods to job worker, only if goods are brought back or otherwise dealt with by the principal and job-worker, within time limit specified in the provisions of section 143.

Time Limit contained in section 143

Under section 143, if the principal supplies goods to manufacturer under intimation, then he shall be required to bring back to any of his place of business, the inputs after completion of job work or otherwise within one year or capital goods within three years of their being sent out. The restriction is not applicable to moulds and dies, jigs and fixtures, or tools. Alternatively, such processed goods or capital goods can, within the aforesaid period, also be supplied from the place of business of a job worker on payment of tax within India, or with or without payment of tax for export. However, in order to supply such goods directly from the place of job-worker, principal shall either be required to declare the job-worker’s place as his place of business or the job worker should be a registered dealer. In other words, if the place of job-work is not registered with the department, the processed goods shall be first required to be brought to any registered place and it can be supplied only from such place.

In this context, another question may arise that, if the job-worker has his own registration with the department and the principal decided to supply the goods directly from the place of business of such job-worker on payment of duty, then who shall pay the tax on such supply, principal or job-worker? In this regard, Explanation below section 21 provides that, the supply of goods, after completion of job work, by a registered job worker shall be treated as the supply of goods by the principal referred to in section 143, and the value of such goods shall not be included in the aggregate turnover of the registered job worker. Besides section 143(2) also provides that, the responsibility for keeping proper accounts for the inputs or capital goods shall lie with the principal. If legislative intention is to make the principal liable to pay tax in respect of such supply, then this explanation was more suitable u/s. 143 instead of section 21. It would also mean that, principal would be required to register job-worker’s premises as his place of business (notwithstanding the job-worker has his own registration) as only in that case principal would be in a position to declare and pay tax on such outward supplies in his GSTR-1.

In short, it appears that, section 143 requires the job-workers to pay GST only in respect of their processing/ job working charges and not on the transaction value of the processed goods. In addition to job work charges, if any waste and scrap is generated during the job work, the job worker shall be required to pay tax on supply of such scrap if he is registered and only in cases where such job-worker is not registered, payment is required to be made by the principal.

Whether section 143 is applicable, if Job-worker’s Premise is registered as additional place of business of Principal, where both are located in the same State

The aforesaid discussion will be applicable, if principal and job-worker are located in different States. However, if they are located in the same State, then the question may arise as to what would happen, if the job-worker’s place of business is registered by the principal as its additional place of business? In that case, whether it would be necessary to take recourse to provisions of section 143.

Author is of the view that, in such case, provisions of section 143 will be of no consequence. The concept of supply presupposes existence of more than one person. Under GST, the transaction between two units of the same entity without consideration is regarded as supply only if said units have obtained separate registration. Therefore, if both the units are covered in the same registration certificate, the movement of goods between such units would not be regarded as supply for the purpose of GST. The movement of goods within places of businesses covered under same registration also does not contemplate any reversal of ITC. Hence, if job-worker’s place in the same State is registered as additional place of business of the principal, supply of goods made by principal to job-worker as his additional place of business would not attract GST, the question of reversal of ITC would not arise and the supply of processed goods from the said premises of job-worker to any other premise of the principal in the same State (covered under same registration) would also not attract GST. Besides, the principal would be in a position to supply the processed goods to his customers directly from place of such job worker in a routine manner, that being his own registered place of business. The job-worker will only be required to pay GST on his job-working charges and if the job-worker is unregistered, principal would be liable to pay it under reverse charge mechanism and claim ITC thereof.

Author is therefore of the view that, if the job-worker  is located in the  same State as that of Principal, it is advisable to register job-worker’s premises as his additional place of business.

Rule 10 – Conditions and restrictions in respect of inputs and capital goods sent to the job worker

As per Rule 10, the inputs, semi-finished goods or capital goods shall be sent to the job worker under the cover of a delivery challan issued by the principal, including where such goods are sent directly to a job-worker. The delivery challan shall be issued at the time of removal of goods for transportation, by the principal to the job worker and shall contain the following details:

–   delivery challan should be serially numbered not exceeding sixteen characters, in one or multiple series, and shall contain a date.

–   name, address and GSTIN of the consignor, if registered,

–   name, address and GSTIN or UIN of the consignee, if registered,

–   HSN code and description of goods,

–   quantity

–   taxable value,

–   place of supply, in case of inter-State movement, and

–   signature.

The details of challans in respect of goods dispatched to a job worker or received from a job worker during a tax period shall be included in FORM GSTR-1 [ Table -13] furnished for that period.

Where the inputs or capital goods are not returned to the principal within the time stipulated in section 143, the challan issued under sub-rule (1) shall be deemed to be an invoice for the purposes of the Act.

Transitional Provisions concerning Job-Worker

As per section 141 where any inputs/ semi-finished goods received at a place of business had been removed as such or removed after being partially processed to a job worker in accordance with the provisions of existing law prior to the appointed day and they are returned to the said place on or after the appointed day, no tax shall be payable if such inputs/ semi-finished goods, after completion of the job work or otherwise, are returned to the said place within six months from the appointed day. If however, such inputs / semi-finished goods are not returned within a period of 6 months as specified in section 141, then CENVAT Credit taken by the principal manufacturer on such inputs / semi-finished goods is liable to be recovered from the manufacturer in accordance with provisions of section 142(8)(a). Similar provisions are also contained in respect of excisable goods sent for job work for further processing not amounting to manufacture, carrying out tests etc. As regards semi-finished goods/excisable goods sent for further processing, carrying out tests etc., section 141 allows transfer the said goods to the premises of any registered person for the purpose of supplying therefrom on payment of tax in India or without payment of tax for exports within the period specified in this sub-section. Section 141 also requires the manufacturer and the job worker to declare the details of the inputs or goods held in stock by the job worker on behalf of the manufacturer on the appointed day in such form and manner and within such time as may be prescribed. As per Rule 3 of Transition Rules approved by Council of 04.06.2017, principal and job-worker shall submit declaration in Form TRAN-1 specifying therein, the stock of the inputs, semi-finished goods or finished goods, as applicable, held by him on the appointed day. The relevant Format is contained in Table-9 (a) and (b) of TRAN-1 and such form is also required to be furnished by the job-worker whether or not he is registered in GST.