PROCESS AMOUNTING TO MANUFACTURE OR PRODUCTION OF GOODS

[Dr. Sanjiv Agarwal]

Process amounting to manufacture or production of goods (Clause 40 of section 65 B)

"process amounting to manufacture or production of goods" means 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 for the time being in force.

Earlier, there was no such definition but ‘manufacture’ was defined to mean the same as per section 2(f) of Central Excise Act, 1944.

The definition applies to any process which amounts to both, manufacture of goods or production of goods which implies that there will be difference between ‘production’ and ‘processing’ and both are used in juxtaposition.

It implies –

a)      any process

b)      process a which excise duty is tenable under section 3 of Central Excise Act, 1944, or

c)      any process amounting to manufacture of alcoholic liquor meant for humor consumption / opium / Indian hemp / other narcotic drugs.

d)      any process amounting to manufacture of narcotic on which excise duty is leviable under any State Act.

According to TRU clarification dated 16.03.2012, the phrase ‘processes amounting to manufacture or production of goods’ has been 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 (1 of 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 entry, therefore, covers manufacturing activity carried out on contract or job work basis provided duties of excise are leviable on such processes under the Central Excise Act, 1944 or any of the State Acts.

Service tax would be levied on processes, unless otherwise specified in the negative list, not amounting to manufacture or production of goods carried out by a person for another for consideration. Some of such services relating to processes not amounting to manufacture are exempt under Notification No. 12/2012-ST dated 17.03.2012.

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.

To attract excise duty under section 3 of the Central Excise Act, the article must satisfy the twin attributes of excisable goods- mobility and marketability – or it should find a place by that name in the Schedule to the Act; Commissioner of Central Excise, Mumbai v Josts Engineering Co. Ltd [2002 (8) TMI 107 (SC)].

The expression duty of excise is limited in its connotation only to basic duty of excise levied under the Act or it also covers special duty of excise levied under various Finance Bills and Acts, additional duty of excise levied under the Additional Duty of Excise (Goods of Special Importance) Act, 1957 and any other kind of duty of excise levied under a central enactment; Union of India v Modi Rubber Limited, [1986 (8) TMI 60 (SC)].

Prior to Finance Act, 2012 amendment, ‘production or processing of goods for, or on behalf of, client, was taxable under clause (v) of section 65(19) under business auxiliary services.

Manufacture also gets explained by some judicial decisions. In Union of India v. Parle Products [1993 (1) TMI 100 (SC)], it was held that processes could not amount to manufacture unless at the end of it a commercially new and distinct article emerges. Supreme Court in Union of India v. DCM 1977 (l) ELT J199 observed that manufacture used as a verb means to bring into existence a new substance and does not mean merely to produce some change in a substance. In other words, the produce which arises out of the process must be commercially a distinct commodity different from that out of which it is processed. Whether or not something results in manufacture would depend on the facts of the case. It is well settled that a question as to when a manufacture of product takes place within the meaning of Section 2(f) of the Act is a mixed question of law and fact. The nature and the extent of processes may vary from case to case. When a change takes place and a new and distinct article comes into existence known to the consumers and the commercial community as a commercial product, which can be no longer regarded as the original commodity, such a change constitutes manufacture.

Processing of Goods and Production

Mere processing of goods cannot be called as production of goods. There should be a new identifiable goods must be come into existence to say that production has taken place. This processing work will be amount to production only if a new and identifiable product comes into existence. However the manufacture is exempted from Service Tax net hence it is assumed that the intermediary process in relation to manufacture will be covered.

If the service provider undertaking any activity in relation to production and the following tests are satisfied, then it will qualify for the production-

• The activity should  amount to  production or manufacture.

• The service provider shall be engaged in any process of the production.

• The activity has to be undertaken on behalf of / for another person (the client.)

Following points may also be noted in relation to processing and production —

• Mere processing of goods is not production of goods

• If new identifiable goods come into existence, then it can be called as production

• Processing would lead to production of new and identifiable product comes into existence

• Processing may be an activity in relation to production

• For taxability, processing should not lead to manufacture.

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