|
|||||
|
|
|||||
|
|||||
|
Job Work Valuation- Central Excise [Submitted by Mr. Madhukar N Hiregange, FCA, DISA(ICAI)] The outsourcing mantra has been in vogue in the manufacturing sector for some time. This trend has now seen a substantial increase with marketing organisation sticking to their own core competencies and getting the products manufactured by third parties. This could be done where the third parties buys all the inputs and supplies the finished product or alternatively all the materials are supplied by the customer and the third party is only a job worker who convert and returns. The former is also a time tested tax planning device which ensures that the marketing and high overheads of such organisation are not subjected to central excise duty. However this is only applicable to products not covered by Tariff Rate under Section 3(2) and MRP based levy Under Section 4A of the Central Excise Act 1944. In this article we examine the valuation at the hands of such job worker in various alternatives. The levy of excise under Section 3 of the Central Excise Act 1944 is on all excisable goods manufactured and removed for home consumption. The critical factor is who manufactures the said goods whether the raw material supplier or the job worker. It is possible that the raw material supplier himself is also a manufacturer. Section 2(f)(i) which is relevant defines manufacture as including any
process incidental or ancillary to the completion of the manufactured
product. Various decision of the Supreme Court have arrived at a
conclusion that where the product undergoes a change whereby the name
characteristics or use of the product under go a change then that activity
is said to be a process of manufacture { Hawkins Cookers Ltd. Vs CCE 1997
(96) ELT 507(SC), UOI Vs Parle Products Ltd. 1994 (74 ) ELT 492(SC),
Ujagar Prints Vs UOI 1988 (38) ELT 535}. The emerging of a distinct and
different item is therefore important. Further the definition sets out
that the word manufacturer shall be construed accordingly and shall
include not only a person who employs hired labour in the
production or manufacture of excisable goods but also any person who
engages in their production or manufacture on his own account. However where the job worker is an independent legal and real entity having his own infrastructure, labour, finance and production facility then he cannot be considered to be a hired labour and would have to be levied cenvat on his own right. In such cases since this is not a sale as per sales tax / Vat laws, it is one under central excise where the transfer of possession is itself considered a sale and the need to transfer the property is not necessary. ( Section 2(h)) Raw Material Supplier a Trader The job worker who works on principal to principal basis would similarly be the manufacturer liable for central excise duty if any applicable { UOI Vs Cibatul Ltd. 1985 (22) ELT 302(SC) and other above}. This is so even when the buyer had control over quality in the production of goods by the job worker, manufacturer would be the job worker himself. This ratio hold good for loan licensees also as they are also only job workers with a license. In this case the valuation would be governed by Rule 11 of the Valuation Rules 2000 read with the decision of Ujagar Prints discussed above. The calculation would be: Conversion cost of Job worker ( Including his Materials cost and Profit ) + Amount realized on sale of scrap of RMS materials + Cost incurred directly by the RMS for testing of materials sent by job worker to independent testing agency + Cost of Materials supplied free of cost Customer * + Cost incurred by Raw Material supplier to reach the raw materials to JW.
This view is fortified by the CBEC Circular no. 619/10/2002 - CX dt. 19.2.02 where considering the decisions of the supreme court in Ujagar Prints as well as Pavan Biscuits case the method of valuation is given departmental concurrence. In part of the circular it specifically mentions - "The assessable value in such cases will not include the profit or the expenses (like advertisement and publicity, overheads etc.) incurred by the buyer (or the supplier of the raw materials), where the dealing between the two are on principal to principal basis". The job worker in this type of operations may also at his option pay the higher duty based on the selling price of the RMS who maybe an intermediate or final customer. This however may also depend on the customers needs and the products competitiveness. Raw Material Supplier also Manufacturer Under Levy This type of person can either send the materials under Rule 4(5)(a) for the manufacture and after the receipt at the time of removal discharge the duty on the appropriate value. This would be the case where the job worker does not add any material at all. The use of consumable and tools which may also be quite material is not to be reckoned. In this case the job worker would only charge the labour charges and would not discharge the excise duty on the onus of paying the same would be on the principal. It is also possible that the job worker adds materials, which are consumed in the manufacture of the final product and delivered / transferred to the raw material supplier. Even in this case the customer may send the raw materials under Rule 4 and receive back the finished goods valued at only the cost to job worker. That is to say without including the value of inputs supplied under Rule 4(5) (a). This view is logical as the Rule has been brought in to enable the outsourcing and as long as the value does not escape taxation, the law enables the same. Further this gains strength from the decision of the supreme court in a recent decision of International Auto Ltd. { 2005 (183) EL:T 239 (SC)} where the question was whether the value of materials supplied under Rule 57 F (2) by the principal [equivalent to the present Rule 4(5)(a)] was to be included in the value of the resultant product. Their Honour categorically held that the value need not be included as they had not availed the credit in respect of inputs. The subject of job work has time and again been probed by the revenue and statistics on the same are being collected to examine whether this avenue of tax planning can be close out.
|
|||||
|
Read our
disclaimer and
privacy policy |
|||||
