Business Auxiliary Service in relation to job work activities involved in manufacture of parts of cycles or sewing machines - Govt exempts activities from service tax.
Definition of Business Auxiliary Service as per Section 69(19) includes various activities mentioned in clauses (i) to (vii), but does not include any activity that amounts to manufacture within the meaning of clause (f) of Section 2 of the Central Excise Act, 1944.
There is a widespread practice in the trade and industry to outsource the manufacturing activity either in full or in part. This is popularly known as job work. The job workers always do not “completely” manufacture the goods, but sometimes send the semi finished goods to the principal manufacturer. As per Section 2(f) of the Central Excise Act, 1944, the definition of manufacture includes any activity incidental or ancillary to the completion of the final products. Therefore these job workers claim exemption under Notification 214/86 CE in respect of the manufacturing activities undertaken by them.
Thus the job-work activities undertaken are squarely covered under the definition of manufacture given under Section 2(f) of the Central Excise Act, 1944, and such activity is outside the purview of service tax under Section 65(19).
However, in some places, demands were raised on these activities of job work under Business Auxiliary Service, ignoring the exclusion in Section 65(19) of the Finance Act, 1994. Since the process undertaken by the job worker is not “complete manufacture”, they say, service tax has to be paid by them, as the exclusion is not applicable in such cases.
To overcome the situation, instead of going for a clarification, an exemption notification was issued vide 8/2005 ST dated 1.3.2005, exempting the taxable service of production or processing of goods for, or on behalf of, the client referred in sub-clause (v) of clause (19) of section 65 of the said Finance Act, from the whole of service tax leviable thereon under section 66 of the said Finance Act, but at the same time added a rider that the exemption is not applicable if the finished good are subject to Nil rate of duty.
Now, once the activity undertaken amounts to manufacture, there is no need to tax the same under Business Auxiliary service and then issue an exemption notification for that. And having given an exemption, which is redundant, it defies logic as to why service tax has to be paid if the finished goods are subject to Nil rate of duty.
Incidentally, there are some goods under central excise which are exempted in public interest, but are manufactured on job work basis. Since the department demands service tax as per the above notification, the very purpose of exemption is defeated. So now the Govt has given another exemption Notification, exempting the activities undertaken in relation to manufacture of cycle parts or sewing machines. The notification exempts the (NON!) taxable service of specified in sub-clause (zzb) of clause (105) of section 65 of the Finance Act, provided by a person to any other person in relation to one or more of the specified process during the course of manufacture of parts of cycles or sewing machines, subject to the following conditions, namely:-
a) the aggregate value of taxable service in relation to one or more of the specified process provided by a service provider, does not exceed rupees one hundred and fifty lakhs during the preceding financial year;
b) the exemption shall be restricted to the first clearances, wherein the aggregate value of taxable service in relation to one or more of the specified process provided by a service provider does not exceed rupees one hundred and fifty lakhs, made on or after the 1st day of April in any financial year; and
c) where the service provider also undertakes one or more of the specified process in relation to manufacture of parts or whole of goods leviable to Central Excise duty, such service provider shall maintain separate accounts of receipt, production and clearance of exempted and dutiable goods and services.
Notwithstanding anything contained in sub-para (b), exemption shall be restricted to the clearances, wherein the aggregate value of taxable service in relation to one or more of the specified process provided by a service provider, does not exceed rupees sixty three lakhs during the remaining part of the current financial year.
Explanation.- For the purposes of this notification, “specified process” means electroplating, zinc plating, anodizing, heat treatment, powder coating, painting including spray painting or auto black.
Now, try to understand the condition (c) above. It says, if the service provider is also undertaking the activities in relation to goods on which are leviable to Central Excise duty (this service is clearly excluded from Business Auxiliary Service), he has to maintain accounts. Why? Is it because after crossing 1.5 Crores, he pays service tax in respect of exempted goods and does not pay service tax in respect of dutiable goods, and may use common services, take credit and use it for payment of service tax? Can't it be clarified more?
NOTIFICATION NO. Dated: November 12, 2009