Valuation of goods manufactured by a job worker – What is the value?
A Netizen sent us a rather lovable mail, which forced us to do a little research. The good Netizen wrote,
I have seen that your web portal gives all the information on direct and indirect taxation and the articles written by experts give correct analysis of the subject matter. I must also mention about breaking news and the analysis contained on each and every judgement in breaking news.
As you and your experts are writing so much on each and every subject, I would be grateful if you can throw light on provision of Rule 10A of Central Excise Valuation Rules through DDT or by way of article. I am given to understand that there is lot of doubt about the said provision in the minds of industry as most of them think that Rule 10A is applicable even in case of normal transaction (where principal manufacturer does not supply any material or may supply one of the raw materials and goods are sold by job worker to principal manufacturer and not transferred).
As per my understanding of the law, Rule 10A is applicable only when all the materials required for manufacture are supplied by principal manufacturer to a job worker and after manufacturing goods are not sold but transferred to principal manufacturer by a job worker. I would be obliged if you can give correct understanding of the said provision either through your DDT or by way of special article on the subject.
Here is what we think about it:-
In Budget 2007 a new rule i.e., Rule 10A has been introduced in Central Excise Valuation (Determination of Price of Excisable goods) Rule 2000, vide Notification No. 9/2007-C.E. ( N.T.) dated 1.3.2007 in respect of the goods produced or manufactured by Job Worker. Before this amendment, the goods manufactured by a job worker were assessed as per the ratio of Ujagar Prints case.
As per Rule 10A,
In case where the gods are sold by the principal manufacturer, the value for payment of duty is the “transaction value” at which the goods are sold by the principal manufacturer. In case where the goods are not sold at the time of removal from the factory of the job worker but are transferred to the principal manufacturer's depot or to his consignment agent's premises, then the value is the “Normal Transaction Value” of such good sold from the depot or the consignment agent's premises.
In any other case, like where the goods are brought back to the principal manufacturer's premises for use in further manufacture, or where the goods are sold to the related person of the principal manufacturer, the value has to be determined based on the other valuation rules as made applicable mutatis mutandis to the job work clearances.
Many thinkers in the field think that Rule 10A is applicable even in case of normal transaction (where principal manufacturer does not supply any material or may supply one of the raw materials and goods are sold by job worker to principal manufacturer and not transferred). But there is also a view that Rule 10A is applicable only when all the material required for manufacture are supplied by principal manufacturer to a job worker and after manufacturing goods are not sold but transferred to principal manufacturer by a job worker.
To understand the above, we need to examine Section 4 (1)(a) and 4(1)(b) of the Central Excise Act which reads as under:
a. in a case where the goods are sold by the assessee, for delivery at the time and place of the removal, the assessee and the buyer of the goods are not related and the price is the sold consideration for the sale, be the transaction value;
b. in any other case, including the case where the goods are not sold, be the value determined in such manner as may be prescribed.
The provisions of Valuation Rules (including Rule 10A) are resorted to only when the conditions of Section 4 are not satisfied.
So in case where the transaction between the job worker and the principal manufacturer involves “sale”, but not “transfer” of goods, then the value can be arrived under Section 4 itself, as the transaction value at which the goods are sold by the job worker.
In case where the finished goods are not sold, but are transferred to the principal manufacturer, then the value has to be arrived under Section 4(1)(b) read with Rule 10A of the valuation rules.
There is a third case also. In case where the transaction between the job worker and the principal manufacturer is “sale” but not “transfer” of goods, with the principal manufacturer supplying some of the material free of cost to the job worker, then the value has to be arrived based on the transaction value plus the value of the material supplied free of cost by the principal manufacturer (Ref: Rule 6 of the Valuation Rules)
So the extent of material supplied by the principal manufacture (whether full or part) is not really relevant and the only parameter is the nature of transaction between the principal manufacturer and the job worker, ie, whether it is sale or transfer of goods. In fact, when Rule 10A was introduced, a noted consultant advised that all the principal manufacturers can convert the job work agreements to “ sale “ agreements and can pay duty on the transaction value of the job worker instead of the transaction value of the principal manufacturer as envisaged under Rule 10A.
Further, from the definition of the job worker, which is
“For the purposes of this rule, 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 authorized by him."
it is clear that the inputs or goods have to be supplied by the principal manufacturer or any other person authorized by him.
This can be divided into two scenarios. One where the principal manufacturer himself supplies the goods required for the job work and the other where any other person authorized by the principal manufacturer can supply the goods to the job worker. The second part is the one which has to be dealt with a little cautiously. From a plain understanding of the second part we can also deduce that the job worker can procure the material on his own but from the persons authorized by the principal manufacturer.
This can lead further to two more situations. One, where the job worker purchases the inputs from the authorized person and the second where the authorized person supplies the material to the job worker but on account of the principal manufacturer.
So from the above we can envisage three situations of material supply from the principal manufacturer to the job worker. In the two situations above, if the job worker manufactures out of the material received from a principal manufacturer or a person authorized by him, then the provisions of Rule 10A will be applicable.
However, in the situation where the job worker actually purchases the inputs from the authorized person, the transaction could be kept out of the purview of Rule 10A by putting forth the argument that the material was not actually supplied by the principal manufacturer or by his authorized person but purchased by the job worker. In that case the manufacturer cannot be viewed as a 'job worker' to the material supplier or buyer.
Now coming back to the situations where the principal manufacturer supplies the principal raw materials to the job worker, if the job worker also utilizes some material or consumables in the process of manufacture (the subject of your query) then it will not dilute the character of the transaction as a job work transaction and would still come under the purview of Rule 10A.
Further, if a transaction is a sale between two entities then it will not be viewed as job work and therefore it will not come under purview of Rule 10A.