In re Oerlikon Balzers India Pvt. Ltd. (GST AAR Maharashtra)
Question 1:- Whether activity of surface coating undertaken by the Applicant in the State of Maharashtra on original/new goods received from Customer is classifiable under service accounting code 9988 more specifically under code 998898 as job work activity chargeable to tax at 12% in terms of entry no. 26(id) of Notification 11/2017 Central Tax (Rate) as amended or at 18% in terms of entry no. 26(iv) of Notification no. 11/2017.
Answer:- The activity of surface coating undertaken by the Applicant on original/new goods received from Customer (tool manufacturers and not end users) is classifiable under service accounting code 9988 more specifically under code 998898 as job work activity chargeable to tax at 12% in terms of entry no. 26(id) of Notification 11/2017 Central Tax (Rate) dated 28.06.2017, as amended.
Question 2:- Whether activity of surface coating undertaken by the Applicant in the State of Maharashtra on old, worn out or used goods received from Customers is classifiable under service accounting code 9988 more specifically under code 998898 as job work activity chargeable to tax at 12% in terms of entry no. 26(id) of Notification 11/2017 Central Tax (Rate) as amended or under Service accounting code 9987 more specifically under code 998729 as repairs chargeable to tax at 18% in terms of entry no. 25(ii) of Notification no. 11/2017.
Answer:- The activity of surface coating undertaken by the Applicant on old, worn out or used goods received from Customers (end users) is classifiable under service accounting code 9987 as repairs chargeable to tax at 18% in terms of entry no. 25(ii) of Notification no. 11/2017-CTR dated 28.06.2017, as amended.
FULL TEXT OF THE ORDER OF AUTHORITY OF APPELLATE ADVANCE RULING,MAHARASHTRA
The present application has been filed under Section 97 of the Central Goods and Services Tax Act, 2017 and the Maharashtra Goods and Services Tax Act, 2017 [hereinafter referred to as “the CGST Act and MGST Act” respectively ] by M/s. Oerlikon Balzers India Pvt. Ltd., the applicant, seeking an advance ruling in respect of the following questions.
1. Whether activity of surface coating undertaken by the Applicant in the State of Maharashtra on original/new goods received from Customer is classifiable under service accounting code 9988 more specifically under code 998898 as job work activity chargeable to tax at 12% in terms of entry no. 26(id) of Notification 11/2017 Central Tax (Rate) as amended or at 18% in terms of entry no. 26(iv) of Notification no. 11/2017.
2. Whether activity of surface coating undertaken by the Applicant in the State of Maharashtra on old, worn out or used goods received from Customers is classifiable under service accounting code 9988 more specifically under code 998898 as job work activity chargeable to tax at 12% in terms of entry no. 26(id) of Notification 11/2017 Central Tax (Rate) as amended or under Service accounting code 9987 more specifically under code 998729 as repairs chargeable to tax at 18% in terms of entry no. 25(ii) of Notification no. 11/2017.
At the outset, we would like to make it clear that the provisions of both the CGST Act and the MGST Act are the same except for certain provisions. Therefore, unless a mention is specifically made to any dissimilar provisions, a reference to the CGST Act would also mean a reference to the same provision under the MGST Act. Further to the earlier, henceforth for the purposes of this Advance Ruling, the expression ‘GST Act’ would mean CGST Act and MGST Act.
2. FACTS AND CONTENTION — AS PER THE APPLICANT
2.1 Oerlikon Balzers Coating India Pvt. Ltd., the applicant, an Indian subsidiary of Oerlikon Balzers AG, provides surface coating services to its customers with respect to various goods such as tools, inserts, semi-finished goods, capital goods etc. The goods are coated with material such as titanium, chromium, aluminum etc., to enhance their life, efficiency, strength and performance.
2.2 Applicant undertakes surface coating on semi-finished/ original as well as old and worn out goods received from customers. The manufacture process of semi-finished/original tools involves Gear cutting, drilling, sharpening, coating, cleaning, inspection etc. The process of ‘coating is outsourced by such tool manufacturers to the Applicant. Coating is therefore one of the process involved during mans facture of semi-finished or original tools.
2.3 process of coating old, used or worn out goods remains the same, but the said goods are not sent by Customers for carrying out any part of the process of manufacturing but instead to restore the functionality of the said tools and make them reusable for such Customers. One additional process required for such old and worn out tool is re-sharpening which is done by the applicant themselves or is outsourced to third parties.
2.4 Activities undertaken by the Applicant are in the nature of job work’ as defined under Section 2(68) of the Central Goods and Services Tax Act, 2017 (‘the CGST Act).
2.5 Further, both, the service accounting codes (SAC) and the explanatory notes for supply of services do not specifically mention job work as description of service in respect of any of the tariff items. Headings 9987 and 9988 of the explanatory notes is relevant to determine the classification of services supplied by the Applicant. Heading 9987 covers Maintenance, repair and installation (except construction) services and Heading 9988 covers Manufacturing services on physical inputs owned by others. However, the explanatory notes as well as the SAC do not exactly cover the set of services supplied by the Applicant at six-digit level under heading 9987.
Whereas, the six digit level description of services at 998873 falling under Heading 9988 is akin to the services supplied by the Applicants.
2.6 Applicable rate of GST is prescribed under Notification No. 11/2017-C. T. (R), dated 28.06.2017 as amended (‘the Notification). The term job work is mentioned at S. No. 24 and S. No. 26 of the said Notification. S. No. 24 covers Heading 9986, and is not relevant to the impugned services. Sr. No. 26 covers Heading 9988. Further, the Headings from 9981 to 9989 are covered under Section 8 i.e. Business and Production Services. Sr. No. 25 of the Section 8 in the Notification covers Maintenance, repair and installation (except construction) services and Sr. No. 27 covers other manufacturing services; publishing, printing and reproduction services; materials recovery services. The applicable GST rate on the services covered under the said Headings was generally 18 percent with few explicit exceptions by way of full exemption or partial exemption to services in relation to agricultural produce, printing and stationery etc.
2.7 The Applicant for both the set of services considering, the following facts, discharged the GST at the rate of 18% for the period from 01.07.2017 to 30.09.2019. Applicant, accordingly for both the set of services supplied, considered 9988 as HSN code during the said period.
2.8 Central Government amended Sr. No. 26 of the Notification no. 11/2017 vide Notification 20/2019 C.T.(R) dated 30.9.2019 (effective from 1.10.2019) (‘the Notification 20’) so as to reduce the applicable rate of tax on the activity of Job work (except job work pertaining to certain specified goods from 18% to 12%. Accordingly, vide Sr. No. 26(id) of the amended notification the activity of ‘job work’ (except job work pertaining to certain specified goods) is chargeable to tax at 12% with effect from 1.10.2019. Applicable rate of GST on activity of ‘Maintenance & Repair’ services, however, continues to remain at 18% in terms of Sr. no. 25(ii) of Notification no. 11/2017.
2. 9 Further, as per CBIC Circular No. 126/45/2019 dated 22.11.2019, it can be said that the services of job work as defined under Section 2(68) are subject to GST rate of 12% except in cases where the job work is respect of specified goods or in respect of goods supplied by the unregistered person However, there is no clarity regarding the scope and meaning of the term ‘repairs’ under the GST Act. The activity of ‘Repair’ is most akin to description provided under SAC 9987 namely, ‘Maintenance, repair and installation (except construction) services’ However impugned activity is also not clearly defined under the said SAC and the explanatory notes to Chapter 99.
2.10 The gist of the coating process undertaken is as under:-
a. Applicant carries out surface coating by the process of Physical Vapor Deposition (PVD). Such coating improves the productivity, wear resistance, strength and efficiency of such goods and in effect brings down the production cost for the user. Tools received from customers are of varioustypes like • New/Used tools from OEMs (Original Equipment Manufacturers); • New/Used tools from End Users; • Automotive/Precision/Decorative Components from OEMs.
b. The goods received are pre-cleaned depending upon whether such goods are used goods and cannot be visually inspected If the tools are in good condition and can be coated, accordingly, depending upon the type of tools the various processes like, De-coating, Re-sharpening (Regrinding), Nitriding, USI Cleaning, Degassing, Polishing, Fixturing, Coating, Post treatment, and Quality Inspection, etc. is carried out.
2.11 The process of coating undertaken on original goods received in pristine condition is in the nature of ‘Job work under GST, whereas the process of coating undertaken on old, used or worn out goods can be categorized as job work as well as ‘repairs’ under GST.
Applicants Argument in connection with coating services undertaken on original/new goods:
2.12 Considering the definition of the term job work is defined under Section 2(68) of the CGST Act, 2017, CBIC Circular No. 38/12/2018 – GST dated 26.3.2018 and basis the erstwhile service tax law, the activity of processing or working upon raw material or semi-finished goods supplied to the job worker so as to complete a part or whole of the process resulting in manufacture or finishing of an article is covered within the ambit of job work. The only other mandatory requirement in terms of the definition is that the job worker needs to carry out the said activity on raw material or semi-finished goods supplied by the principal.
2.13 Hon’ble Supreme court in the case of Maruti Suzuki Limited Vs. CCE, New Delhi, 2015 (318) E.L.T. 353 (S. C) has also held that there is a distinction between processing and manufacture and that Electro Deposition (ED) Coating of anti-rust treatment to increase shell life of various component is merely a processing activity and not a complete manufacturing activity.
2.14 The activity undertaken by the Applicant fits the definition of Job work under the erstwhile as well as present law. Further in terms of the Apex court’s ruling also, activity of coating is only a process undertaken on goods.
2.15 The Applicant further submits that as far using own Coating material is concerned, in addition to goods received from the principal, job worker can use his own goods also for providing the service of job work. In this regard, reliance is place on the decision of the Hon’ble Supreme Court in the case of Prestige Engineering (India) Ltd. Vs. Collector Of C.Ex., Meerut 1994 (73) E.L.T 497 (S.C).
2.16 As regards classification of the activity of Job work, in terms of the Scheme of Classification of Services provided under Notification 11/2017 C.T.(R) dated 28.6.2017, activity of job work is covered under SAC 9988 – Manufacturing services on physical inputs (goods) owned by others more specifically under Service Accounting Code 998873
2.17 Basis of rival entries appearing at Sr. No. 26(id) and 26(iv), appropriate rate applicable to the activity of coating services undertaken on such semi-finished/original goods will depend upon whether such coating activity is in the nature of ‘Job work as appearing under entry 26(id) or ‘manufacturing services’ on physical inputs (goods) owned by others as appearing under residual entry no. 26(iv).
2.18 The Applicant submits that from a reading of Heading 9988 (Manufacturing services on physical inputs (goods) owned by others)’ as the broad level heading pertaining to all items under Sr.No. 26, it may appear that the said entry overs only the services which are in the nature of manufacturing, however, taking into consideration the description of various services covered in column (3) of the said entry and the fact that the activity of job work is not specified elsewhere in the said Notification the Applicant believes that the activity of ‘Job work’ is covered under the category of the broad level entry of “Manufacturing services on physical inputs (goods) owned by others’. Accordingly, Job work activity undertaken by them is covered under Sr. No. 26(id) of the Notification no. 11/2017.
2.19 The impugned activity does not amount to manufacture as defined under Section 2(72) of the CGST Act, 2017 since no new product having distinct name, character and use emerges on account of above mentioned Coating activity. The residual entry at Sr. No. 26(iv) may not be applicable in the case of the Company.
2.20 Further CBIC circular no. 126/45/2019 – GST dated 22.11.2019 has clarified that Sr. No. (id) will apply if services by way of treatment or processing is undertaken by a person on goods belonging to another registered person. On the other hand, the entry at item (iv) specifically excludes the services covered by entry at item (id), and therefore, covers only such services which are carried out on physical inputs (goods) which are owned by persons other than those registered under the CGST Act. Applicant undertakes process of coating on goods received from a registered person and as such entry no. 26(id) of Notification 11/2017 Central Tax (Rate) is applicable in their case.
Argument in connection with coatinit services undertaken on old/worn out or used roods
2.21 Coating services undertaken on old/worn out or used goods restores or improves the functionality already created and possessed by the article or thing. Such activity restores the old or damaged goods into good condition and also improves the functionality of the said article. Thus, activity of impugned coating services on old and worn out tools/inserts/capital goods can be categorized as ‘Job work in the nature of ‘repairs’.
2.22 Applicant submits that classification of a service is not determined on the basis of the end result but on the basis of the nature of activity carried out. The nature of goods i.e. whether received in original condition or received in old/worn out condition, does not make any difference in the Coating process undertaken on such goods. In this regard, Applicant relies upon decision of the CESTAT West Zonal Bench, Mumbai in the case of Radiowani Vs. C0mmr. of Service Tax, Mumbai – 1 – 2019 (21) G.S.T.L 157(Tri. Mumbai).
2.23 Basis above, Applicant submits that classification of impugned activity on old/used/worn out goods also falls under service accounting code 998873 as metal treatment and coating services and not under 998729 as Maintenance and Repair services of other goods nowhere else classified and is therefore, w.e.f 1.10.2019, chargeable to tax at 12% under entry 26(id) of Notification no. 11/2017 as amended and not at 18% under entry no. 25(11) of the said is coating Notification.
APPLICANT SUBMISSION DATED 05.10.2021:-
2.24 The Applicant till 30.9.2019 was paying tax at 18% on all kind of Coating services undertaken by them. The Central Government amended Sr. No. 26 of the Notification no. 11/2017 vide Notification 20/2019 C.T.(R) dtd 30.9.2019 (effective from 1.10.2019) (‘the Notification 20’) so as to reduce the applicable rate of tax on the activity of Job work (except job work pertaining to certain specified goods) from 18% to 12%. The applicable rate of GST on the activity of ‘Maintenance and Repair’ services, however, continues to remain at 18% in terms of sr. no. 25(ii) of Notification no. 11/2017.
2.25 The Department has opined that for coating services to be covered under the scope of the term ‘Job Work’ it needs to be understood from the perspective of how the service is provided and not from the perspective of what kind of service it is. The Department is of the view that:-
1. Coating services on New/original Goods received from OEMs are covered under SAC 998873 chargeable to Tax at 12% under entry 26(id) ofNotification no. 11/2017
2. Coating services on New / Original Goods received from end Users is covered under SAC 998717 i.e maintenance and repair services of commercial and industrial machinery chargeable to tax at 18% under entry No. 25(ii) of Notification no. 11/2017
3. Coating services on Old Worn Out tools received is covered under SAC 998717 i.e maintenance and repair services of commercial and industrial machinery chargeable to tax at 18% under entry No. 25(11) of Notification no. 11/2017
2.26 Applicant does not differ on the classification or rate of duty proposed by the Department on services provided under Category 1 above. Applicant differs from the classification under SAC 998717 and rate of duty at 18% under entry No. 25(ii) of Notification no. 11/2017 as proposed by the Department on services provided under category 2 above. With respect to the department’s conclusion that Coating activity undertaken on New / Original Goods received from end Users is in the nature of Alteration services, applicant submits that the Coating activity undertaken by the Applicant is in the nature of treatment or process undertaken on goods belonging to another registered person and as such cannot be taken outside the scope of SAC 9988 and sr. No. (id) of entry 26 ofNotification no. 11/2017.
2.27 Further the inference drawn by the Department that Notification 11/2017-CT (Rate), under entry No. 26, entails that the goods (on which manufacturing services are provided the physical inputs owned by others is also misleading and totally out of context. Entry 26 at the broad level under Column 2 covers Manufacturing services on physical inputs (goods) owned by others. By including the term (goods) before the term physical inputs the legislature has clearly aligned the broad description of the said services to the definition of the term job work under Section 2(68). Accordingly Sr. No. (id) of entry 26 clearly covers job work services i.e treatment or process on goods owned by others. CBIC has also clarified the same vide para 4 of Circular No. 126/45/2019 dated 22. 11.2019.
2.28 That in cases where the new goods are supplied to the applicant for the process of coating by the end users of such goods, these “new goods” cannot be categorized as physical inputs upon which any process of manufacture is being performed. The Department has also quoted Circular No. 38.12/2018 dated 26.6.2018 to infer that job worker is expected to work on goods sent by the principal i.e manufacturer and not the end user. Applicant submits that CBIC Circular No. 126/45/2019 has also clarified that Sr. No. (id) of Entry 26 covers only job work services as defined in Section 2(68) of CGST Act, 2017, that is, services by way of treatment or processing undertaken by a person on goods belonging to another registered person. Further, for the purpose of ‘job work’ the term principal as per Section 19 & Section 143 of the CGST Act means the registered person who sends the goods for Job work. Hence, inference drawn by the Department that any treatment or process can be held as amounting to job work only if the goods are sent by the manufacturer and not the end user is also not proper and correct and goes against the definition of job work under Section 2(68) itself.
2.29 The department has submitted that, new goods supplied by the end users are subjected to the process of alteration intended for enhancing their life, efficiency, strength and performance but, not as a part of manufacture. Applicant submits that such inference is not proper and correct. Applicant’s services are in the nature of treatment or process undertaken on goods belonging to another registered person and as such fits the definition of job work under Section 2(68). Hence, covered by the scope of sr. no. (id) of entry 26 of Notification no. 11/2017.
2.30 Department has submitted that the coating services provided by the applicant on new goods supplied by end users are rightly classifiable under SAC 998717 as Maintenance and repair services of commercial and industrial machinery. Applicant submits that SAC under heading 998717 does not cover alteration services and as such the coating activity cannot be placed under the said heading. Further inferences from other headings cannot be the basis for classification of services under another heading.
2.31 SAC under heading 998873 clearly covers ‘Coating services’ and as such needs to be taken as the reference point for classifring the activity undertaken by the Applicant. Basis above submissions, Applicant pleads that coating activity undertaken on new goods received from end users are also covered under the scope of :job work ‘activity classifiable under SAC 9988 and as such chargeable to tax at 12% under sr. No. (id) of elm)/ 26 of the Notification no. 11/20177. Applicant Offers from the classification under SAC 998717 and rate of duty at 18% under entry No. 25(ii) of Notification no. 11/2017 as proposed by the Department on services provided under Category 3 above. Section 2(68) of the CGST Act, 2017 does not make any distinction between new goods or old / worn out goods for the purpose of categorizing any activity as job work activity. Further circular 126/45/2019 clarifies on similar lines and as such the coating activity undertaken by the Applicant on old / worn out tools are also covered under the scope of sr. no. (id) of entry 26 of Notification no. 11/2017.
2.32 We also rely on the following decision of the Advance Ruling authority in support of the above submissions namely
