TIOL-DDT 927 · the untouched capture
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<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong><font color="#663399" size="3">TIOL-DDT 927 </font><br>
11.08.2008 <br>
Monday </strong></font></p>
<p align="center"><font color="#006600" size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>Valuation of goods manufactured by a job worker – What is the value? </strong></font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">A Netizen sent us a rather lovable mail, which forced us to do a little research. The good Netizen wrote, </font></p>
<blockquote>
<p align="justify"><font color="#FF6633" size="2" face="Verdana, Arial, Helvetica, sans-serif">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. </font></p>
<p align="justify"><font color="#FF6633" size="2" face="Verdana, Arial, Helvetica, sans-serif">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 <strong>DDT </strong> 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). <br>
<br>
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. </font></p>
</blockquote>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Here is what we think about it:- </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">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. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">As per Rule 10A, </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">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. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">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 <em>mutatis mutandis </em> to the job work clearances. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">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. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">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: </font></p>
<blockquote>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">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; </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">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. </font></p>
</blockquote>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The provisions of Valuation Rules (including Rule 10A) are resorted to only when the conditions of Section 4 are not satisfied. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">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. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">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. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">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) </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">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. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Further, from the definition of the <strong>job worker, </strong>which is </font></p>
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<p align="justify"><font color="#FF6633" size="2" face="Verdana, Arial, Helvetica, sans-serif">“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." </font></p>
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<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">it is clear that the inputs or goods have to be supplied by the principal manufacturer or any other person authorized by him. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">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. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">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. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">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. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">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. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">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. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">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. </font></p>
<p align="center"><font color="#006600" size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>Tighten your belts – there is no money – Expenditure Department wants a cut in Government spending </strong></font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The Department of Expenditure in the Finance Ministry wants the Government Departments to spend less as there is a financial crunch. There has to be a mandatory 10 per cent cut in non-plan expenditure for:- </font></p>
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<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">a) Overtime Allowance (except in the case of industrial establishments where OTA is granted due to statutory obligations) </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">b) Domestic and Foreign Travel expenses </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">c) Publications </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">d) Professional Services </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">e) Advertising and Publicity </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">f) Office expenses </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">g) POL </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">h) Other administrative expenses </font></p>
</blockquote>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>No ostentatious and unnecessary expenditure: </strong>All Government offices under the Central Government shall make every effort to avoid ostentatious and unnecessary expenditure. Day-to-day functioning shall be managed with utmost economy in operating expenses which shall be confined to the minimum essential in areas such as maintenance of buildings, office equipment, transport, communication, conservancy, stationery, furniture, hospitality and furnishings at the offices/offices at residences, etc. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>Seminars and Conferences: </strong>Utmost economy must be observed in organizing Conferences/Seminars/ Workshops, etc. The prescribed expenditure ceilings for holding such events should be enforced and a 10% cut on the budgetary allocation for seminars and conferences shall be effected. Only such Conferences/ Seminars/ Workshops which are absolutely necessary may be held. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>Domestic and Foreign Travel: </strong> It has been decided that Ministries/Departments shall lay down quarterly or half yearly ceilings, based on the annual budget under these heads, which they may not exceed during the quarter or half-year in question. This will enable Ministries/Departments to prioritize and phase out their expenditure during the whole of the year. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>Rush of expenditure towards the end of the financial year </strong> continues to be an area of concern. As per extant instructions, not more than one-third (33%) of the Budget Estimates may be spent in the last quarter of the financial year. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">In addition to these instructions, the Cabinet Secretary has instructed all Secretaries that:- </font></p>
<blockquote>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">(i) As far as possible, Ministries/ Departments will use our Missions abroad to represent our interest instead of deputing officers from India . Facilities of video conferencing may be used effectively so that all avoidable visits abroad are indeed avoided. Every proposal for foreign travel must be supported by reasons explaining why these alternatives cannot be availed of. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">(ii) Departments which undertake foreign travel relatively more frequently should negotiate bulk travel discounts with travel agents. Also wherever possible, excursions/ concessional tickets should be bought even if this means sacrificing some flexibility that comes with full fare tickets. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">(iii) Where travel is unavoidable, it may be ensured that officers of the appropriate level dealing with the subject are sponsored, instead of those at higher levels as these results in increase in the cost. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">(iv) The size of the delegations should be kept as small as possible No delegation for foreign travel should exceed five members nor should the duration exceed five days. In cases where these numbers have to be exceeded due to unavoidable reasons, the matter may be placed before the Screening Committee of Secretaries giving detailed justification, irrespective of whether the proposal is required to come to the Screening Committee of Secretaries for approval as per the present guidelines. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">(v) Separate guidelines also exist in regard to travel abroad of Ministers and Secretaries at the same time, particularly during Parliament session. These also need to be complied with without any laxity. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">(vi) In accordance with the austerity instructions issued by the Finance Ministry on 5th June 2008, Ministries/ Departments are to lay down quarterly or half yearly ceilings under the head of foreign travel. Ministries/ Departments shall report the results of this exercise (after carrying out the 10% cut) to the Department of Expenditure. All future Screening Committee proposals will be processed keeping these ceilings in view. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">(vii) Officers also may be encouraged, although not mandated, to travel by a class lower than their entitlement. The final decision in this regard may be left to the officers. </font></p>
</blockquote>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The Cabinet Secretary wants to <strong> get the maximum 'value for money' for our public expenditure. </strong></font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">This kind of instructions is being routinely issued for the last fifty years or so and our babus and ministers continue to live like princes. Why waste more paper on these instructions which are going to be treated with scant respect? </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><a href="http://www.taxindiaonline.com/RC2/inside2.php3?filename=wnew/cabinetsecretary.htm" target="_blank"><strong>Department of Expenditure No. 7(1) E.Coord/2008, Dated: June 5, 2008</strong></a><strong> and <a href="http://www.taxindiaonline.com/RC2/inside2.php3?filename=wnew/cabinetsecretary.htm" target="_blank">Cabinet Secretary's D.O. No. 23(2) E.Coord/2006, Dated: June 12, 2008 </a></strong></font></p>
<p align="center"><font color="#006600" size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>Jurispruden<font color="#FF6633" size="5">tiol</font></strong></font><strong><font color="#006600" size="2" face="Verdana, Arial, Helvetica, sans-serif"> – Tomorrow's cases</font></strong></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong><font color="#006600" size="2" face="Verdana, Arial, Helvetica, sans-serif"><b><img src="http://www.taxindiaonline.com/RC2/image/stories/ddt_hammer.jpg" alt="Legal Corner Icon" width="100" height="84" hspace="5" border="0" align="left"></b></font></strong></font></strong></font></strong></font></strong></font></strong></font></strong></font></font></strong></font><font color="#663399">Central Excise </font> </strong></font></p>
<p align="justify"><font color="#FF6633" size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>waste and scrap arising out of cutting of M.S. Sheet Plates for making them of required size and specification, for own use in the factory for repair and maintenance of plant and machinery – excisable and dutiable: Rajasthan High Court </strong></font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The repair and maintenance may require replacement of a floor sheet of machinery, which sheet may require particular specification, in its thickness, metal properties, heat and cold resistance, and so many other aspects. Likewise, it may be some pipe, some tube, some plate, some pulley, or the like, at times it may be required to be fitted by nuts and bolts, at times it may be required to be fitted by heat process, while at times it may be required to be fitted by welding process, and in those events, the bringing about of the part concerned in existence in the workshop by a mechanical process, from out of plates, sheets, channels, beams, angles, welding electrodes etc. would definitely amount to manufacturing process, and if metal waste, and/or its scrap is generated in the course of manufacturing, in our view, there is no escape from the conclusion, that such metal waste, and scrap, would be exigible to excise duty. </font></p>
<p align="justify"><font color="#663399" size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>Central Excise </strong></font></p>
<p align="justify"><font color="#FF6633" size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>Certificate from competent authority produced to AC to avail benefit of Notification No 108/95 – Authorities accepted this and later held that Japan Bank for International Cooperation not an International Organization – Difference of opinion amongst Members on question of limitation – Matter referred to Third Member: CESTAT </strong></font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>CENTRAL</strong> Excise law is saddled with jinxed provisions notable among them being Rule 6 of CENVAT Credit Rules. Notification 108/95-CE dated 28.08.1995 also joined the bandwagon by courting controversies. The latest being an insertion by way of Explanation 2 in the said Notification, which has led to some eminent experts in the field to comment that goods supplied to projects in terms of this Notification would become relics fit for museums. This apart there were several litigations in the field with regard to eligibility of exemption to projects funded by certain International organizations like Japan Bank for International Cooperation (JBIC). Recently, in one such instance before the Tribunal, there was difference of opinion amongst the two Members of the Bench resulting in the matter being referred to the Third Member. The circumstances surrounding this reference have made us sit up and take stock of this particular Order. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong><font color="#663399">Service Tax </font> </strong></font></p>
<p align="justify"><font color="#FF6633" size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>Branded Medicaments containing alcohol and duty of excise paid thereon under Medicinal & Toilet Preparations Act – <em>Prima facie </em> applicants are producing goods for client and are covered under BAS – Tribunal orders pre-deposit of Rs.50 lakhs </strong></font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>JUST</strong> a fortnight ago, we reported the Tribunal decision in Rubicon Formulations [</font><font size="1" face="Verdana, Arial, Helvetica, sans-serif"><strong><a href="http://www.taxindiaonline.com/RC2/subCatDesc.php3?subCatDisp_Id=52&filename=legal/cestat/2008/2008-TIOL-1161-CESTAT-MUM.htm" target="_blank">2008-TIOL-1161- CESTAT-Mum</a></strong></font><font size="2" face="Verdana, Arial, Helvetica, sans-serif">],
where the Bench in a similar matter has ordered a pre-deposit of Rs.25 lakhs
by the 12th August 2008. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">This time it is no different as the Bench is the same, except of course, the amount to be pre-deposited is Rs.50 lakhs simply because the service tax demands are of Rs.5.50 crores. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong><font color="#663399">Income Tax </font> </strong></font></p>
<p align="justify"><font color="#FF6633" size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>Appellant is technical person with specialized knowledge - Taxes on appellant borne by employer - Conditions like employment in India as technical person, non-resident status fulfilled - Appellant satisfied conditions of s. 10(5B) and eligible for exemption: ITAT </strong></font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>THE</strong> Assessee was a qualified software engineer with technical expertise and experience. He was deputed to India to work as Director of Technology and was responsible for design and implementation of software projects. He worked in India from July 2001 to May 2004. Under tax equalization policy, his employer agreed to pay equalized net salary agreed to pay the income-tax payable by the assessee while on deputation. In view of this, the assessee claimed exemption u/s 10(5B) of the Act. The income-tax paid by employer on behalf of the assessee was requested to be treated as exempt u/s 10(5B) in the return submitted by the assessee. Accordingly total income returned by the assessee was Rs 45,14,090/- after claiming exemption u/s 10(5B) of Income-tax Act. The Assessing Officer disallowed the claim for exemption under s. 10(5B) on the ground that the requisite conditions therein were not fulfilled. </font></p>
<p align="justify"><font color="#663399" size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>See our columns Tomorrow for the judgements </strong></font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><font color="#FF6666">Until Tomorrow with more <strong>DDT </strong></font></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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