Job-Work : Old Wine In Better Bottle? (Part-1)

Job Workers are generally understood as
persons who perform a part of a manufacturing process on goods belonging to another.
Traditionally, job workers performed outsourced manufacturing/ processing
activities by receiving goods belonging to their principal and returning the
same after due processing. The arrangements are usually made for certain
commercial reasons, such as:

1.   Work requires special skilled labour

2.   Work can performed only with specialised
machinery

3.   Infrequent requirement not requiring a
full-fledged set-up

4.   Job worker can perform same/ similar tasks at
lower operating costs

5.   Paucity of space for job work activity

The objective of this article is to discuss
the concept of job work from the perspective of its scope and the general
procedures involved in a job work arrangement.

Job Work – A specie of a Contract

Job work contracts are usually a combination
of a service contract coupled with bailment. The owner of the goods delivers or
transfers possession over his goods to another person with a condition of
returning the goods or disposing them under the directions of the owner. The
essentials of a contract of job work would be as follows:

1.   The objective of the contract is to perform a
process/ treatment over the goods

2.   For the purpose of its fulfilment, the owner
of goods (generally called the principal) delivers/ transfers the possession of
goods with a specific mandate to the transferee (called the job worker) under a
contract of bailment

3.   Ownership continues to rest with the
principal awarding the job work

4.   The job worker performs his process on the
goods received and on completion delivers the goods back to the principal or
any other place as designated by the principal

5.   Job worker would have to account for the
consumption of goods/ scrap and wastage

6.   Job worker would ensure that the goods are
not merged / mixed with own goods or any other principals’ goods

7.   Job worker is required to take reasonable
steps for the safety of the goods in capacity as a bailee of these goods

Job Work – Its relevance and history

The concept of Job work was originally
contained in the Excise law. Excise law was an activity driven law in the sense
that the manufacturing process in a factory formed the basis of imposition of
duty. The ownership over goods was not relevant for deciding the taxable person
(1988 (38) E.L.T. 535 (S.C.) Ujagar Prints, etc. vs. UOI). It laid
emphasis on the physical location, movement and identity over the goods and
considered the terms of contract between the parties as an inessential element.
Therefore, every removal of goods, whether in processed or unprocessed form,
whether under a contract of sale, bailment or otherwise, had excise
implications either as duty payment or Cenvat Credit reversal. In order to
overcome the procedural difficulties of an intermittent duty payment or credit
reversal, the Government extended certain benefits to job workers and reduced
multiplicity of tax implications and compliance under job work transactions.
The benefits can be put into two baskets:

i.    Notification 214/86-CE dated 25-03-1986
granted duty exemption in case a job worker was engaged in manufacturing
activity as long as the principal undertook to discharge the applicable duty on
the finished goods.  Notification
83/94-CE and 84/94-CE exempted job worker manufacturer and supplier
manufacturer under the SSI scheme from payment of duty.

ii.    Rule 4(5) of Cenvat Credit Rules, 2004
allowed the manufacturer/ service provider to retain the Cenvat Credit availed
on inputs/ capital goods where such goods were sent for the purpose of job work
and returned within the prescribed time limit.

The important point that needs to be
observed is that both these benefits operated under different domains. The
former granted a duty benefit which was otherwise applicable in case of a
manufacturing activity undertaken by a job worker and the latter granted the
benefit of retaining Cenvat Credit inspite of goods being physically removed
for a specific purpose. Yet, the common intent behind this was to relax the
complexities in view of physical movement of goods and ensuring that the goods
are duly accounted at the original location after the job work.

On the other hand, the Sales tax / VAT law
did not contain specific provisions in respect of job work. Infact, one may say
that this was not essential because the levy was a transaction based levy with
the sole emphasis on the ‘transfer of ownership’ over the goods. As long as the
principal retained its ownership over the goods, any manufacturing activity on
such goods did not lead to tax implications. Pure job work being a contract for
service and bailment did not fall within the ambit of VAT (except for some
stray works contract cases). The movement of goods (inter-state or intra-state)
for job work coupled with transport documents did not generally have any
sales/VAT tax implications. At most, the law prescribed certain documentation
for movement of goods in order to protect the interest of revenue and tap any
diversion of goods.

One may say that excise is a ‘boundary’
based law whereas sales tax is a ‘transaction’ based law. Therefore, concept of
job work had prominence under the excise law rather than the sales tax
law. 

Concept of Job work under GST

The GST law is considered a pseudo-sales tax
law with its peripheries made from the excise law. Two important facets of the
law are (a) it’s a contract based transaction law; and (b) it’s a multi-point
levy on both goods and services. Every form of value addition, whether on goods
or of service is taxed under the GST law at the transaction level and not at
the unit level. Job work itself being a value-added activity is a ‘taxable
service’ and did not require any special treatment.

Yet, the GST law has introduced the concept
of job work.  The only possible reason
attributable to such a move could be that job work arrangements would involve
significant to and fro movement of goods between the principal and the job
worker. Hence from a revenue perspective it was important to ensure that the
inventory of goods (esp. tax credited goods) are duly accounted for by the
principal after completion of job work. Reporting of outward and inward
movement of goods for job work enables the revenue to ascertain the end-use of
the goods.

Framework of Job work under GST

Job work provisions are contained u/s. 19
and 143 with certain transitional provisions u/s. 141. Job work has been
defined u/s. 2(68) to mean any treatment or process undertaken by a person on
goods belonging to another registered person and the term job worker should be
construed accordingly. Section 19 is titled ‘Taking input tax credit in respect
of inputs and capital goods sent for job work’ and placed under the Input tax
Credit chapter (Chapter V). Section 16, 143, 141 use terms such as ‘inputs’ and
‘capital goods’ rather than ‘goods’ in general implying that the job work
provisions should be understood to extend only to those goods which are
availing the benefit of ITC. This indicates that job work provision were
intended to operate in the lines of Rule 4(5) of Cenvat Credit Rules, 2004 and
not as an exemption from payment of tax.

An examination of the general provisions and
the waiver conditions in section 19 and 143 further substantiate this
conclusion. Section 19 provides a relaxation to one of the primary conditions
of availing input tax credit i.e. the receipt of goods u/s. 16(2)(b). The
section state the following:

–    Credit on Inputs / capital
goods is permitted even in cases where such goods are directly sent to the
job-workers premises for job work without first being brought to the premises
of the principal provided they are returned in the specified period;

–   the goods are returned to
the principal within a period of one year or three years; and

–   in case of any violation,
the inputs/ capital goods originally sent out would deemed to be supplied by
the principal to the job worker on the day they were originally removed

Section 143 under Chapter XXI –
Miscellaneous contains procedural provisions to be followed in job work
transactions which state the following:

–     The principal is permitted
to send inputs/ capital goods to a job worker without payment of tax provided
they are returned within the prescribed period of one/ three years

–    It is permitted to supply
these goods directly from the job workers premises without bringing the same
back to the principal’s place of business if the job worker is registered or
the job workers place of business is included in the certificate of
registration of the principal

–     The principal is
accountable for the goods sent on job work

–     Waste and scrap generated
during job work is permitted to be supplied by a job worker directly from his
place of business on payment of tax

–     An extended meaning to the
term input has been provided which states that intermediate goods would also be
termed inputs – implying that intermediate goods would be permitted to remove
without payment of tax to a job worker.

Section 19 and 143 contain similar
provisions i.e. permitting zero-tax movement of goods back and forth between
the principal and job worker. The content of both the sections overlap each
other except on three points (a) treatment of scrap/ wastage; (b) inclusion of
intermediate goods for job work activity and (c) permitting clearance of goods
from job worker premises. Yet, one noticeable difference between section 19 and
143 is that while section 19 talks about ‘retention of the input tax credit’
in the hands of the principal, section 143 grants the benefit of removal of
goods to a job worker ‘without payment of tax’.

Rate of Tax/
Classification under GST

Job work activity has been deemed as a
supply of services under Schedule II of the GST Act (Entry 3). Notification
11-2017- Central Tax (Rate) (as amended) has provided the rates of tax for job
work activities. The said activity has been classified under HSN 9988 &
9989. Explanatory note to HSN 9988 states that it covers services performed on
physical inputs owned by others and are generally characterised as outsourced
manufacturing units, etc. The value of the service is based on the service fee
and not the value of goods manufacturer. HSN 9989 provides for classification
of other manufacturing services and cases which involve intangible inputs and
not necessarily physical inputs. The service rate schedule prescribes the
following rates for job work activities:

Issues under the GST law

A) 
What is the scope of the term ‘job work’?

The fundamental question arising under job
work is the extent of value addition that is permissible under a job work
arrangement. Is there any outer limit on the value addition (say the entire/
substantial part of the manufacturing activity)? Can a job worker be the owner
of the principal raw material itself while performing job work? These questions
are to be viewed independently – the former question is on substantial value
addition on account of the ‘processes’ performed by the job work and the latter
question is on value addition on account of the ‘type of inputs’ used by
the job worker?

Addressing the first aspect, it may be
relevant to examine the issue based on a controversy raised by a recent advance
ruling. The Maharashtra Advance Ruling Authority in re: JSW Energy Limited
(GST-ARA-05/2017/B-04) had the occasion to examine whether coal converted
into electrical energy on job work basis would fall within the definition of
job work. The Advance Ruling authority held that the job work was not on
coal rather the coal was consumed in the process of generation of
electricity resulting in a manufacturing activity and hence beyond the scope of
the term job work. The Advance Ruling authority suggested that job work and
manufacturing activity are mutually exclusive and the presence of the term
manufacture limits the scope of the term job work. On appeal, the appellate
advance ruling authority (MAH/AAAR/SS-RJ/01/2018-19) held that the
definition does not permit complete transformation of tangible inputs into intangible
inputs – only minor additions are permitted in a job work arrangement (relying
on Prestige Engineering case discussed below). The AAAR stated that
though processing of inputs resulting in manufacture is permitted under job
work arrangements, the section requires the principal to bring back the inputs
and in the absence of a one-to-one correlation between the inputs and the
processed output, the activity is not within the scope of job work.

We need to analyse the definition of job
work a little more intricately. The term job work is defined to mean a
treatment or process undertaken on goods belonging to another registered
person. The emphasis of the definition is on two things (a) ownership of
goods and (b) treatment/ process being performed on those goods. The
term treatment and process are very generic terms without any limits. In this
context, the term treatment generally means giving some properties (either
chemical, physical or biological) to another item. The term process has been
very widely understood by the Supreme Court in the past. In CCE vs.
Rajasthan State Chemical Works 1991 (55) E.L.T. 444 (SC) it was held that
the natural meaning of process would refer to any treatment of certain
materials in order to produce a good result, a species of activity performed on
the subject-matter in order to transform or reduce it to a certain
stage.  The definition of job work reads
as follows:

2(68) “job work” means any treatment or
process undertaken by a person on
goods belonging to another registered person and the expression “job worker”
shall be construed accordingly

In comparison, job work was defined in the
CE notification 214/86 as follows:

“Explanation I. – For the purposes of
this notification, the expression “job work” means processing or
working upon of raw materials or
semi-finished goods supplied to the job worker/ so as to complete a part or
whole of the process resulting in the manufacture or finishing of an article or
any operation which is essential for the aforesaid process”

The AAR held that the treatment or process
should be performed upon the goods
for it to be termed as job work. Grammatically speaking, the term ‘on’ is used
as preposition¹ to establish a relationship between a pronoun and
the rest of a sentence. Preposition generally have an object for which it
establishes a relationship. The legislature have used to term ‘on’ in order to
make goods as the object of the entire
statement. The said preposition is establishing a relationship between the
person and the goods and does not establish a relationship between the
process and the goods. It proves that the term process in the definition is
unqualified and should be understood in its natural and complete sense. Unlike
the central excise definition which requires working upon raw materials,
current definition in GST is limited to performing the treatment on goods.
Since the definition is completely silent on the result of the treatment or
process, the definition should be widely construed.

Now referring to section 19 and 143, we can
infer that both sections require the principal to bring back the inputs and
capital goods within a specific time frame. The AAAR & AAR have commented
that the meaning of job work should also be gathered from section 19 and 143.
Since the provision require the principal to bring back the inputs, the term
job work should be understood as only limited to cases where the identity of
the goods is retained and as such returned to the principal. The AAAR failed to
appreciate that section 143 also permits the principal to ‘supply or export’
such inputs with or without payment of tax from the job-workers premises. Any
interpretation should be made based on contemporaneous circumstances. If such
narrow interpretation is made, principal manufacturers would also be barred
from sending raw materials to job work and clearing the finished products after
the manufacturing activity to end customers. Where the provision itself permits
onward clearance of finished products subsequent to a manufacturing activity,
the requirement of retention of the original identity of goods is an apparent
conflict with the term manufacture. The entire provision would become
unworkable with this absurd interpretation of the AAAR.

_____________________________________________________________

1     The term preposition is a word governing, and
usually preceding, a noun or pronoun and expressing a relation to another word
or element in the clause. 

Moreover, when 143(5) itself speaks about
generation of scrap and wastage and use of intermediate goods ‘arising’ from
inputs, it is necessarily referring to a manufacturing activity. This conveys
the intention that job workers are permitted to carry out manufacturing
activity including the fact that the existence of the original input is not
visible in the final product.  The AAR
failed to understand that the section does not contemplate that the inputs or
capital goods should be brought back in its original condition – such an
interpretation would defeat the concept of job work itself. It should be
interpreted to mean that inputs should either be contained in final products
after job work in some form or the other or the inputs should cause the further
generation of the new product emerging from the job work process. The important
aspect is that the original input should identifiable (either by its cause,
content, character) with job work process and the final product. The Supreme
Court in Prestige Engineering (India) Ltd. vs. CCE Meerut Samples – 1994
(73) E.L.T. 497 (S.C.) while explaining the scope of the definition of job
work under an exemption notification stated that job work should not be
narrowly understood as requiring the job worker to return the goods in the same
form, this would render the notification itself redundant (since the definition
specifically contemplated ‘a manufacturing process’) but it also cannot be so
widely interpreted to allow an arrangement where the process involves
substantial value addition. 

The AAAR commented that coal converted into
electrical energy has not been brought back. The condition of bringing back
should be understood from the original intent under Rule 4(5) of Cenvat Credit
Rules i.e. ensuring tax credited inputs do not escape the taxation net while
the goods leave the premises of the taxable person. As long as they have been
used for a value added activity for the taxable person, the condition should be
understood as satisfied and the benefit should be granted. The narrow
interpretation adopted in the AAR only stifles the intent of the law.

One may also observe that the original
ITC-04 tool on the GSTN portal (form for reporting outward and inward movement
of goods under job work activity) required that quantity code of the original
inputs match with the quantity code of the processed item after job work. This
was a challenge as in many cases manufacturers would receive the processed item
in a different form/ quantity. After representations the revised ITC-04
(amended vide Notification 39/2018 dt. 04-09-2018) has suggested that the
original challan date and number need not be given if one-to-one correspondence
between the original goods send for job work and the returned goods is not
possible. This adds credence to the above conclusion that establishing identity
or existence of the original product is clearly not a requirement of the law
and the term job work should not be narrowed down by the requirement of
bringing back the inputs. This leads to an inescapable conclusion that a job
worker can perform any value added activity on the goods.

B) Are the terms manufacture and job work
mutually exclusive?

The AAR concluded that manufacture is
excluded from the definition of job work in view of a separate definition. This
was part of the ruling modified by the AAAR on appeal by stating that job work
activity may or may not result in manufacture. The term manufacture refers to
processing of raw materials or inputs resulting in emergence of a new products
having a distinct name, character and use. On scanning the entire law, the term
manufacture has been used with limited reference: composition scheme, transitional
credit, deemed export.  The term
manufacture is used in completely independent context and does not even
remotely narrow down the scope of the term job work.

In other words, the job work is understood
from a contractual sense while manufacture was understood from the physical
properties of the product. In terms of a contract, if a bailor-baliee
relationship is established between the contracting parties with specific
directions for performing a treatment/ process, it would necessarily be a job
work activity. There could be cases which are job work but do not result in a
manufacturing process and there could also be cases were a manufacturing
activity is not a job work transaction in a contractual sense. It is in view of
this independent concepts that under excise, job worker declaration was
required only where the job worker performed a manufacturing activity. Where
the job worker performed limited testing activities, it was not essential for
the job worker to comply with the exemption conditions of Notification 214/86.

The CBEC in its flyer have stated as
follows:

“Job work sector constitutes a
significant industry in Indian economy. It includes outsourced activities that
may or may not culminate into manufacture. The term Job work itself explains the
meaning. It is processing of goods supplied by the principal. The concept of
job work already exists in Central Excise, wherein a principal manufacturer can
send inputs or semi-finished goods to a job worker for further processing. Many
facilities, procedural concessions have been given to the job workers as well
as the principal supplier who sends goods for job work. The whole idea is to
make the principal responsible for meeting compliances on behalf of the job
worker on the goods processes by him (job worker), considering the fact that
typically the job workers are small persons who are unable to comply with the
discrete provisions of the law.”

The flyer clearly states that job work
activity may or may not result in manufacture. The idea behind the concept of
job work is to facilitate the tax free movement of goods and making the
principal responsible for goods under job work. The explanatory notes to the
HSN/SAC chapter headings also provide explain job work as involving an
outsourced manufacturing activity. Further, the notification prescribing the
rates also specify both manufacturing and processing activities to be included
under the SAC for job work. All these clearly indicate that the concept of job
work overlaps with the concept of manufacture and both need not be considered
as mutually exclusive concepts.

C) Whether
job worker can introduce substantial raw materials in its job work process?

A parallel question is whether the
definition prohibits a job worker from introducing substantial/ critical raw
materials in relative comparison to that received from the principal
manufacturer. A plain reading of the section certainly does not bar this
activity. The definition is open ended and left these matters to the mutual
contractual terms between the principal and job worker. Prima-facie, is
appears that law does not prohibit the introduction of substantial / high value
inputs or critical inputs being used by the job worker during the entire
processing. As an example there is no restriction for a goldsmith to use its
own gold where the solitaire diamond is being supplied by the principal
manufacturer. 

However, the Supreme Court in Prestige
Engineering (supra) does not permit an open-ended definition of the term
job work. It stated that the definition should not be widely understood to
permit the job worker from performing substantial value added activity. This
understanding of the law was made while interpreting an exemption notification.
As discussed, the concept of job work is being introduced as a facility for
retaining the Cenvat credit rather than as an exemption provision. The
interpretation should be such that the facility made available is effective
rather than a dead letter. The Madras High Court in 2015 (316) E.L.T. 209
(Mad.) CCE vs. Whirlpool of India ltd held that the definition of Prestige
engineering case is limited to that notification and does not extended over the
Cenvat Credit Rules. Therefore, one can certainly take a stand that the excise
understanding of value added activity should not narrow down the scope of the
prevailing definition.

The CBEC Circular No. 38/12/2018, dated
26-3-2018 has clearly permitted the job worker to use his own goods apart from
the goods received from the principal and has not restricted the type/ nature
of goods to be used by the job worker:

“5. Scope/ambit of job work : Doubts have
been raised on the scope of job work and whether any inputs, other than the
goods provided by the principal, can be used by the job worker for providing
the services of job work. It may be noted that the definition of job work, as
contained in clause (68) of section 2 of the CGST Act, entails that the job
work is a treatment or process undertaken by a person on goods belonging to
another registered person. Thus, the job worker is expected to work on the
goods sent by the principal and whether the activity is covered within the
scope of job work or not would have to be determined on the basis of facts and
circumstances of each case. Further, it is clarified that the job worker, in addition
to the goods received from the principal, can use his own goods for providing
the services of job work.”

Moreover, from
an economics perspective, one would be neutral to the fact that critical inputs
being used by the job worker. Being a value added tax law with job work
services also being taxed under its ambit, it is really immaterial on who
introduces the raw material since commercial terms would automatically
determine the transaction value of the each leg of the supply (incl. job work)
and taxes would be appropriately recovered. From a revenue administration
perspective, the benefit of job work was to tide over the compliance of input
tax credit reversal and availment during the intermediary phase. Revenue would
monitor the job work movement primarily to ensure that the input tax credit
availed on such goods is used for the intended objects only. Where substantial
value / critical raw materials are purchased by the job worker itself, the risk
exposure of granting the benefit u/s. 19 is correspondingly reduced. The input
tax credit on the bullion purchased has been now been availed by the goldsmith
and section 19 operates only the domain of inputs sent by the principal to the
job worker and not on the self-purchased inputs.

Rationally, this credit of bullion does not
jeopardise the input tax credit claim on the diamond purchase and sent by the
principal. Hence revenue authorities should not question the quantum / nature
of inputs being used by the job worker as it not result in any additional revenue.

The above conceptual understanding of job
work can be tabulated with some practical examples:

In summary, the concept of job work has not
undergone a substantial change from its parent law. There is no reason to limit
its scope with reference to some terminologies as is being attempted by the
AAR. In fact, the concept of job work has widened in relative comparison to
from its excise origin. Its full effect should be given especially in a value
added system. The AAAR have deviated from the essence of job work and this
needs to be examined by a higher forum. The other procedural issues on job work
can be undertaken in a subsequent article.