TIOL-DDT 439 · the untouched capture
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<p> <font size="2" face="Verdana, Arial, Helvetica, sans-serif"><b><font color="#663399" size="3">TIOL-DDT
439</font><br>
31 08 2006<br>
Thursday</b></font></p>
<p align=center><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong><font color="#006600">Job
work valuation – Mazumder Committee report</font></strong></font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The
Mazumder Committee has just submitted its report to the government. The Committee
consisted of </font></p>
<blockquote>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">1)
Shri S. DuttMajumder, Chief Commissioner, Customs, Mumbai III zone; </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">2)
Shri N.Sasidharan, Commissioner, Customs ( General ), New Customs House, Mumbai
; </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">3)
Shri.K.K.Sharma, Commissioner, Central Excise, Mumbai II Commissionerate;
</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">4)
Shri M.Srinivas, Additional Commissioner of Central Excise, Mumbai II (co-opted);
and </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">5)
Shri S.K.Rahman, Joint Commissioner, Directorate General of Valuation, Mumbai
(co-opted).</font></p>
</blockquote>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">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. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The
Committee apparently has not sought the opinion of the trade; obviously the
purpose was to protect revenue. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>A
Little background:-</strong></font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">According
to Section 3 of the Central Excise Act, there is a duty on manufacture. Let’s
recall a few definitions:-</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Section
2(f): “<strong>manufacture</strong>” includes any process, -</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">(i)
incidental or ancillary to the completion of a manufactured product; and<br>
<br>
(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,<br>
<br>
(iii) xxxxxxxx<br>
<br>
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.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Section
2(e): <strong>factory</strong> 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.<br>
<br>
Section 4(3)(a): “<strong>assessee</strong>” means the person who is liable
to pay the duty of excise under this Act and includes his agent.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Rule
2(c) of the Central Excise Rules 2002: “<strong>assessee</strong>” 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.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>
Some Deductions :</strong></font></p>
<blockquote>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">++
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.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">++
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.</font></p>
</blockquote>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>The
confusion on job work valuation:</strong></font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">It
all started with the original confusion – Post Manufacturing Expenses, which
later the Supreme Court described as a<strong> phraseological inexactitude.
</strong><br>
<br>
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.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">
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.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">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”.<br>
<br>
Some quotes from <i><strong>Ujagar Prints</strong></i> (<a
href="http://www.taxindiaonline.com/RC2/subCatDesc.php3?subCatDisp_Id=50&filename=legal/sc/2002/2002-TIOL-02-SC-CX.htm"><font size="1">2002-TIOL-02-SC-CX</font></a>).
</font></p>
<blockquote>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">++
Computation of the assessable value is one question and as to who should be
liable for the same is another. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">++
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.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">++
This is quite independent of the ownership of goods.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">++
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.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">++
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.</font></p>
</blockquote>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Yet
another conclusion:</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">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. <br>
<br>
More than a decade later in Pawan Biscuits case, the Supreme Court reiterated
<i>Ujagar</i>. 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. <br>
<br>
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 <strong>job work basis, the assessable value is the cost of raw materials
plus the job work charges.</strong></font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The
Board Circular No. <a
href="http://www.taxindiaonline.com/RC2/subCatDesc.php3?subCatDisp_Id=31&filename=notification/excise/2002/excircular619.htm"><font size="1">619/10/2002-CX,
dated 19-2-2002</font></a>, clarified that as per the old Section 4, the Valuation
Rules and the <st1:Street>Apex Court</st1:Street>’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.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">So,
now based on these judgments, valuation has to be done as per Rule 11 (Residuary)
read with Rule 6 (Additional Consideration). </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">But
this does not hold if the job worker is related. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong> The
Committee recommends:-</strong></font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The
Committee has recommended the following legislative amendments:-</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>1.
Manufacturer definition</strong></font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">‘Manufacturer’
to include</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">(i)
a person who employs hired labour in the production or manufacture of the excisable
goods; </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">(ii)
a person who engages in the production or manufacture of excisable goods on
his own account; </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">(iii)
a job worker who is engaged in the production or manufacture of excisable goods
on account of another person including principal manufacturer; or </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">(iv)
a principal manufacturer who gets the excisable goods produced or manufactured
by another person including job worker. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>Amendment
to Section 4(3)(b) : Job worker is related</strong></font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">(b)
persons shall be deemed to be "related" if - </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">(i)
……</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">(ii)
….</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">(v)
they are job worker and principal manufacturer as defined in Section 2(f) of
the Act." </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>Valuation
Rules - a new Rule to make the principal’s price the assessable value.</strong></font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">A
New Rule 8A is proposed in the Valuation Rules:-</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>Rule
SA:- </strong>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". </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>Will
this sound the death bell for job work activities in the country?</strong> The
Committee considered the socio economic factors of closed factories and unemployment,
but observed that<strong> Revenue Department cannot refrain from plugging the
leakage of revenue merely on the ground of socio economic factors.</strong></font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Incidentally
the Committee has not proposed any definition for principal manufacturer and
job worker. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">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? </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>Are
we back to Ujagar?</strong></font></p>
<p align=center><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong><font color="#006600">Focus
product scheme - amendments</font></strong></font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">DGFT
has amended Appendix 37D relating to various products that qualify for benefits
under Focus Product Scheme.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">1.
Woven Carpets under 5702 - hand knotted category only was eligible . Now this
is amended to <strong>hand-woven category only</strong></font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">2.
Tufted carpets - hand knotted category only was eligible, now it is hand-<strong>tufted
</strong>category.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">3.
In respect of Shrimp IQF raw,Squid IQF raw and Cuttlefish IQF raw the eligibility
now is for consumer packs of less than 1 Kg.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><u><a href="http://www.taxindiaonline.com/RC2/subCatDesc.php3?subCatDisp_Id=47&filename=notification/dgft/2006/dgft06pn048.htm">PUBLIC
NOTICE NO. 48/(RE-2006)/2004-2009 Dated : August 28, 2006</a></u></font></p>
<p align="justify"><font color="#FF6666" size="2" face="Verdana, Arial, Helvetica, sans-serif">Until
tomorrow with more DDT </font></p>
<p align="justify"><font color="#FF6666" size="2" face="Verdana, Arial, Helvetica, sans-serif">Have
a nice day. </font></p>
<p align="justify"><font color="#FF6666" size="2" face="Verdana, Arial, Helvetica, sans-serif">Mail
your comments to</font> <font size="2" face="Verdana, Arial, Helvetica, sans-serif"><a href="mailto:vijaywrite@taxindiaonline.com">vijaywrite@taxindiaonline.com</a></font></p>
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