Job work valuation – Mazumder Committee report
The Mazumder Committee has just submitted its report to the government. The Committee consisted of
1) Shri S. DuttMajumder, Chief Commissioner, Customs, Mumbai III zone;
2) Shri N.Sasidharan, Commissioner, Customs ( General ), New Customs House, Mumbai ;
3) Shri.K.K.Sharma, Commissioner, Central Excise, Mumbai II Commissionerate;
4) Shri M.Srinivas, Additional Commissioner of Central Excise, Mumbai II (co-opted); and
5) Shri S.K.Rahman, Joint Commissioner, Directorate General of Valuation, Mumbai (co-opted).
The Committee made exhaustive study of the question of valuation based onm the earlier reports of the Batra Committee and the Rustagi Committee and inputs from seventy commissionerates. The Committee was happy that 70 out of the 93 commissionerates responded to the committee’s questionnaire.
The Committee apparently has not sought the opinion of the trade; obviously the purpose was to protect revenue.
A Little background:-
According to Section 3 of the Central Excise Act, there is a duty on manufacture. Let’s recall a few definitions:-
Section 2(f): “manufacture” includes any process, -
(i) incidental or ancillary to the completion of a manufactured product; and
(ii) which is specified in relation to any goods in the Section or Chapter notes of the First Schedule to the Central Excise Tariff Act, 1985 (5 of 1986) as amounting to manufacture,
(iii) xxxxxxxx
and 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.
Section 2(e): factory means any premises, including the precincts thereof, wherein or in any part of which excisable goods other than salt are manufactured, or wherein or in any part of which any manufacturing process connected with the production of these goods is being carried on.
Section 4(3)(a): “assessee” means the person who is liable to pay the duty of excise under this Act and includes his agent.
Rule 2(c) of the Central Excise Rules 2002: “assessee” means any person who is liable for payment of duty assessed or a producer or manufacturer of excisable goods or a registered person of a private warehouse in which excisable goods are stored and includes an authorized agent of such person.
Some Deductions :
++ it may be possible that a factory may be owned by one person, but the excisable goods there are manufactured by another person for and on behalf of a third person who might be the assessee.
++ To be a manufacturer, you need not necessarily own a factory, You can get your goods manufactured by somebody who has a factory. Or you can set up a factory for somebody and ask him to manufacture for you.
The confusion on job work valuation:
It all started with the original confusion – Post Manufacturing Expenses, which later the Supreme Court described as a phraseological inexactitude.
The textile processors thought that if fabrics were processed on job work basis, the value would only be job work charges. In the Empire Industries case, the Supreme Court emphatically ruled that the value for assessment would be the intrinsic value of the processed fabrics, which is the price at which such fabrics are sold for the first time in the wholesale market.
This settled one issue that job worker’s charges alone does not constitute assessable value. But law as usual did not settle there. “The price should be on the basis of the price at the job worker’s factory, not at the traders’ premises”, was another argument successfully argued before the Supreme Court in Ujagar Prints.
The dust did not settle there. The Supreme Court had to give a further clarificatory order to the Ujagar Order. “The assessable value of the processed fabric would be the value of the grey cloth in the hands of the processor plus the value of the job work done plus manufacturing profit and manufacturing expenses whatever they pay. … It is not necessary to include the trader’s profits who gets the fabrics processed, because those would be post manufacturing profits”.
Some quotes from Ujagar Prints ().
++ Computation of the assessable value is one question and as to who should be liable for the same is another.
++ Duties of excise are imposed on production or on manufacture of goods and are levied upon the manufacturer or the producer in accordance with the relevant rules.
++ This is quite independent of the ownership of goods.
++ It is, therefore, necessary to reiterate that the value for the assessment under Section 4 of the Act will not be the processing charge alone but the intrinsic value of the processed fabrics which is the price at which the fabrics are sold for the first time in the wholesale market.
++ The rules are clear on the computation of that value. If the valuation is made according to the rules as adumbrated in Empire Industries and as clarified, no difficulty should arise.
Yet another conclusion:
The processors became liable to pay duty not because they were the owners of the goods but because they caused the manufacture of the goods.
More than a decade later in Pawan Biscuits case, the Supreme Court reiterated Ujagar. Here was a case of Pawan Biscuits making biscuits for Britannia with raw materials, recipe, packing materials supplied by Britannia and the product manufactured strictly according to Britannia’s specifications. The biscuits were sold in the market as Britannia biscuits. The Tribunal held that Pawan was an agent of Britannia and therefore, it is Britannia’s wholesale price which is to be taken into consideration for arriving at the assessable value. But the Supreme Court did not agree. Following Ujagar, the Supreme Court held that the cost of raw materials plus the job worker’s cost and profit shall be included not the profit of Britannia or the expenses incurred after the manufacture of the biscuits.
With the Supreme Court reiterating the position, as of now this is the settled law of the land. The new Transaction Value and the attendant rules do not address this issue differently. . So as of now the law is when goods are got manufactured on job work basis, the assessable value is the cost of raw materials plus the job work charges.
The Board Circular No. , dated 19-2-2002, clarified that as per the old Section 4, the Valuation Rules and the Apex Court’s decisions in Ujagar Prints and Pawan Biscuits, the value for goods on job work would be the job charges including the profit of the job workers. It will not include the profit or other expenses incurred by the buyer or the supplier of raw materials, if the dealing between the two is on principal to principal basis. The mere fact that the buyer supplied some raw materials was not sufficient ground to contend that the dealings were not at arms length. The Board’s circular clarified that the new transaction value and rules effective from 1-7-2000 did not propose any departure from the principles enunciated in the two Supreme Court judgments.
So, now based on these judgments, valuation has to be done as per Rule 11 (Residuary) read with Rule 6 (Additional Consideration).
But this does not hold if the job worker is related.
The Committee recommends:-
The Committee has recommended the following legislative amendments:-
1. Manufacturer definition
‘Manufacturer’ to include
(i) a person who employs hired labour in the production or manufacture of the excisable goods;
(ii) a person who engages in the production or manufacture of excisable goods on his own account;
(iii) a job worker who is engaged in the production or manufacture of excisable goods on account of another person including principal manufacturer; or
(iv) a principal manufacturer who gets the excisable goods produced or manufactured by another person including job worker.
Amendment to Section 4(3)(b) : Job worker is related
(b) persons shall be deemed to be "related" if -
(i) ……
(ii) ….
(v) they are job worker and principal manufacturer as defined in Section 2(f) of the Act."
Valuation Rules - a new Rule to make the principal’s price the assessable value.
A New Rule 8A is proposed in the Valuation Rules:-
Rule SA:- Where the excisable goods are manufactured for or on behalf of other persons, including a principal manufacturer, and the excisable goods are not sold by the assessee, including a job worker, at the time and place of removal but are transferred to any other place (hereinafter referred to as 'such other place') from where the excisable goods are sold, the value shall be the transaction value of such goods sold from such other place at or about the same time, and where such goods are not sold at or about the same time, at the time nearest to the time of removal of goods under assessment, and where the goods are not sold but consumed at such other place, the value shall be one hundred and ten percent of the cost of production or manufacture of such goods".
Will this sound the death bell for job work activities in the country? The Committee considered the socio economic factors of closed factories and unemployment, but observed that Revenue Department cannot refrain from plugging the leakage of revenue merely on the ground of socio economic factors.
Incidentally the Committee has not proposed any definition for principal manufacturer and job worker.
And what will happen if all job workers declare independence? That is job worker will declare that he is selling the goods to the principal and the transaction is an independent one?