9911796707
TMI Blog“Manufacture or production of goods” – an exemption or a litigation in negative listX X X X Extracts X X X X X X X X Extracts X X X X ..... “Manufacture or production of goods” – an exemption or a litigation in negative list - By: - Pradeep Jain - Service Tax - Dated:- 25-7-2012 - - An article by:- CA. Pradeep Jain CA. Preeti Parihar Introduction:- Exemptions and beneficial amendments are always prone to litigation whether it is due to ambiguous language or due to creative interpretational skills of Revenue officers. Whatever be the reason, the departmental authorities are always less interested in extending the benefit of exemptions to the assessees. One such beneficial provision is being inserted in the negative list which exempts the processes that amount to manufacture or production from the levy under service tax. This piece of diction is about probable liti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gation on this item of negative list. Processing, Production Manufacture slight margin of difference:- The term production is defined as an act of conversion of raw materials into useful materials to satisfy human needs. It can also be defined as a process which transforms raw material into semi-finished or finished goods. Further there are three words often used interchangeably processing , production and manufacture . Every activity which brings change in which input material whether or not visible, is a process . Every process which leads into a substantial change (whether or not that change makes the goods a distinct, distinguishable and differently known commodity in the market), is production and every pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oduction which leads into transformation of goods, i.e., the resultant product has different name, character and use; is manufacture . Of the three, the later two production and manufacture are dealt herein. Past provisions:- Under old scheme of service tax by way of positive list, the service tax was levied on the job work under Business auxiliary services. The taxable services related to job work under this category was explained as production or processing of goods for, or on behalf of, the client . Simultaneously, any activity that amounted to manufacture of excisable goods was excluded from this definition. Thus, any processing or production of goods for or on behalf of the client were liable to service tax unless th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at process amounted to manufacture under section 2(f) of the Central Excise Act, 1944 Provisions under negative list:- The negative list is prescribed under section 66D of the Finance Act. Entry no. (f) therein says that no service tax shall be payable on:- (f) any process amounting to manufacture or production of goods; Thus, under this entry if the process amounts to manufacture or production of goods, it will be exempt from payment of service tax. In this entry, two words are used - "manufacture or production of goods. The word manufacture is defined under section 2(f) of the Central Excise Act, 1944 . But the word production is not defined anywhere in the Act. However, various judicial pronouncemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts have been given from time to time to explain this term. Rulings on the term production :- In the case of Commissioner of Income Tax, Kerala v. Tara Agencies - 2007 (6) SCC 429 , the Hon ble Supreme Court observed that the expression produced was given a wider meaning than the word manufacture . It was held that the word produce or production when used in context of manufacture will include every process which brings into existence new goods, which may however may or may not amount to manufacture. In the case of Commissioner of Income Tax v. Hindustan Metal Refining Works (P) Ltd. - 1981 (1) TMI 58 - (CALCUTTA HIGH COURT) , hon ble Calcutta High Court held that both the words manufacture ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and production apply to bringing into existence something new, which was different from its components. Thus, it was interpreted that if any activity has been held as not amounting to manufacture, the same will not be production also. PSL CORROSION CONTROL SERVICES LTD. Versus COMMR. OF C. EX. CUS., DAMAN [ 2008 (8) TMI 72 - (CESTAT AHMEDABAD) ] :- This decision is related to Business Auxiliary services as existed prior to 1.7.2012. In this case, the Revenue raised the demand under BAS by saying that as their process didn t amount to manufacture, it is covered under the purview of production . It is reiterated that the service tax under BAS was leviable on the activity production or processing on behalf of the cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ient provided it doesn t amount to manufacture. On the other hand assessee argued that the production should lead to emergence of a new commodity which is not the case there. Both the above two decisions of hon ble Apex Court and High Court were discussed by hon ble Tribunal and while affirming to the decision of hon ble Apex Court, it was held that the expressions production and manufacture are not synonymous with each other, though they may be used interchangeably by a layman. However, the expression production of goods as held taxable under BAS may be an activity which leads to a change in the commodity which may not amount to manufacture in terms of Section 2(f) of Central Excise Act . It was further held that every producti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on may not necessarily amount to manufacture but every manufacture would be covered by the expression production . It was thus held that the production of goods , which may not amount to manufacture in strict sense of Section 2(f) would also be covered by the said category of services. It was further held in this case as follows:- The use of different expression i.e. production of goods which may not amount to manufacture, by the Legislature, in its wisdom, only throws light upon the Legislative intent that the production activity which may not be covered by Section 2(f) and may not be liable to pay excise duty in terms of that Act would get covered by the definition of Business Auxiliary Service . Thus, in above decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of hon ble Tribunal, the demand under BAS was confirmed on the production of goods which did not amount to manufacture of goods under section 2(f) of the Central Excise Act, 1944. Analysis of ruling with advent of negative list:- The taxable event under BAS in positive list was production or processing of goods for or on behalf of client . The judicial pronouncements held that the production of goods will also be taxable even if there is no substantial change in the commodity so as to constitute manufacture in terms of section 2(f) of CEA as the words production of goods is also specified in the taxable service of BAS. Now, the same expression production of goods has been brought parallel to manufacture of good ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in the negative list. The phrase is the same production of goods but the context in which it is kept is different in the positive list era, this phrase was used as a taxable event, however, in the negative list, the same phrase has been used as an exempting phrase. Now, the question is whether the same department will interpret the same phrase in the same manner? Production of goods whether SC rulings above will be followed:- The manufacture is already exempted from service tax right from the era of positive list and continued in negative list. If the production of goods also gets exemption under negative list, almost every process will get exemption from service tax. Normally, the processes outsourced are those ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... process which involved substantial amount of man, power and techniques; naturally, these will definitely amount to production even though may not be manufacture in terms of section 2(f) ibid. As such, almost every process sent on job work will lead to production of goods which was taxable under positive list if not amounted to manufacture. The inclusion of word production in the negative list has drastically increased the scope of exemption contained therein and reduced the scope of service tax on job work as compared to positive list. As such, department will not accept the same so easily. Though the language of exemption is clear and unambiguous, yet the intention of legislation is the ultimate tool which is very often used by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he department in such cases. It can be contended that the intention of government is not to exempt the job works normally, only the processes amounting to manufacture are exempted. Further, the word production is not defined anywhere, as such; the department will not accept any process as production so liberally. Another side of the coin:- Under negative list era, specified intermediate processes are exempt under serial no. 30 of mega exemption notification no. 25/2012-ST dated 20.6.2012. The opening phrase of this entry reads as follows:- 30. Carrying out an intermediate production process as job work in relation to Thus, the mega exemption notification exempts the intermediate production process . Here, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he word used is intermediate production process which represents any process in midway to final process, i.e. the process which will result into semi finished goods. There may be cases where after carrying out the job process, the goods are cleared from the premises of the job worker only under the provisions of rule 4(6) of the Cenvat Credit Rules, 2004 . In such cases, whether the exemption under above serial no. 30 will be applicable? In our view, in such cases, this exemption will not be applicable as removal from the premises of job worker indicates that the goods have undergone final production process and are the finished goods. Since the exemption contained under this serial no. is applicable only on the intermediate productio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n process , this exemption will not be applicable on the goods removed under provisions of rule 4(6) of the Cenvat Credit Rules, 2004 . However, here the negative list can save the job workers; which exempts any process amounting to manufacture or production of goods; . Thus, if the job worker not carrying out any intermediate production process, rather he is carrying out a final processing, he may get exemption under the negative list if the process carried out by him amounts to production of goods; provided the departmental authorities don t have any objection on the same. While winding up:- The language contained in the negative list is any process amounting to manufacture or production of goods is plain, cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear and unambiguous. Thus, it can be concluded that even if the process does not amount to manufacture under section 2(f) of the Central Excise Act, but it brings substantial change in the inputs, the same will be covered by this exemption. The impact of this entry in the negative list will be critical one where the goods are removed from the job worker s premises under provisions of rule 4(6) of the Cenvat Credit Rules, 2004 . However, there is no doubt about the fact that the departmental authorities are more often reluctant to extend the intended benefits to the assessees. Let s see, how the creative interpretations of the Revenue officers forbid this benefit to the assessees. - Reply By Dipak Rajpara as = Dear Pradeep Ji, It is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rally a very good analysis done by yourself. Thanking you. Dipak Dated: 11-3-2013 - Scholarly articles for knowledge sharing authors experts professionals Tax Management India - taxmanagementindia - taxmanagement - taxmanagementindia.com - TMI - TaxTMI - TMITax ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
