Contract Manufacturers Vs Job Workers
IN Central Excise, there is a concept called manufacture of goods by a job worker. The job worker also being a manufacturer is liable to pay Central Excise duty, unless exempted. The valuation of job worked goods witnessed many legal battles, with the law finally settled to the extent that the value for payment of duty would be the cost of the raw material plus the job work charges. ( Ujagar Prints case)
However, the taxman realised that many big companies are avoiding central excise duty by getting the goods manufactured on job work and selling them in the market with their brand name and the huge margins of the principal manufacturers were escaping duty.
Thus, a new rule was born in the year 2007. Rule 10 A has been inserted in the Central Excise Valuation (Determination of the Price of Excisable goods) Rules with effect from 1.4.2007. As per this rule the value at which the principal manufacturer sells his goods will be the basis for determining the transaction value for payment of central excise duty by the job worker.
For the purpose of this Rule, Job worker has been defined as
Job-worker means a person engaged in the manufacture or production of goods on behalf of a principal manufacturer, from any inputs or goods supplied by the said principal manufacturer or by any other person authorised by him.
In addition to the above job work method, there is also another concept widely prevalent in the trade. It is called contract manufacturing . Unlike in job work , the contract manufacturers do not get the raw material from the principal manufacturers, but purchase them from the market adhering to the specification of the principal. Sometimes, the vendors are also approved by the principal. The principal buys the finished goods from the contract manufacturer, and sells them with his margin, sometimes affixing his brand name, including the product literature, directions for use etc. (affixing brand name / MRP amounts to manufacture in only specified cases).
In this type of business model, Rule 10A cannot be invoked as the contract manufacturer is not a job worker as defined under rule 10A inasmuch as the raw materials are not “supplied” by the principal. But, though technically not covered under Rule 10 A, this is also a fit case to bring the trading margins of the principal as the principle remains the same in both the job worker model and the contract manufacturer model. Ultimately, in both the cases, it boils down to “you make goods for me and I will sell them”.
The Government should carefully watch different models of the trade and update themselves; otherwise, when they believe that one hole is closed, others will open.
Maybe one more good reason to come out with GST soon.