Government of India
Ministry of Finance
(Department of Revenue)
Central Board of Excise and Customs, New Delhi
Subject : Whether goods manufactured by SSI manufacturer output of raw materials supplied by another person / manufacturer would be entitled to exemption under notification No.1/93 – CE (NT) dated 28.2.1993
I am directed to invite your attention to Board”s Circular No. 50/88-CX-8 dated 20.8.88 (F.No.267/31/88-CX-8) wherein it was clarified in consultation with Ministry of Law that if the raw materials are supplied by a principal manufacturer for the manufacture of any goods on job work basis, then the same would not be entitled for SSI exemption (unless principal manufacturer himself is entitled for SSI exemption) even if job worker is otherwise entitled for SSI exemption. This circular was further modified by Board”s Circular No. 49/90-CX-8 dated 23.7.90 (F.No.267/144/89-CX-8) clarifying that if the relationship between the raw material supplier and the job worker is one of principal to principal, then the job worker will be the actual manufacturer and if from the facts of the case and the terms of agreement between raw material supplier and the job worker, it can be established that the job worker is a dummy unit, or is just a hired labour of the raw material supplier, then raw material supplier would be the principal manufacturer and the job worker would be his workman or hired labour. This clarification has been a subject matter of several audit paras and has also been examined by the Public Accounts Committee.
2. The Public Accounts Committee in its 32nd Report (1th Lok Sabha) considered the matter and found certain deficiencies in the Circular No.49/90 referred to above. The Committee viewed that the said Circular should have clearly defined terms such as raw material supplier/job worker and their relationship and should have been legally vetted. The committee has desired that the said Circular should be modified taking into consideration the deficiencies noticed, in consultation with Law Ministry, with a view to eliminating any ambiguity and scope for misinterpretation which may not only involve the Department in legal wrangles, but also effect revenue collection. The matter has accordingly been examined by the Board in consultation with Law Ministry.
3. It may be mentioned that the issue as to whether the raw material supplier or the job worker will be treated as manufacturer came for consideration before the CEGAT, Special Bench, New Delhi in the case of Kerala State Electricity Board v. Collector of Central Excise [1990 (47) ELT 62 (Tribunal)]. In that case the Kerala State Electricity Board used to get PSC / PCC and RCC poles produced according to their specification and satisfaction with the help of material supplied by them, through contractors. On detailed examination of the Terms and Conditions of the contract between the two, the CEGAT came to the conclusion that the contractors were not merely working as a hired labour under the Board. Instead, the agreement between the Board and the contractors was on principal to principal basis. Accordingly, the Tribunal held the contractors to be the manufacturers in that case. The decision of the Tribunal has been confirmed by the Supreme Court.
4. In view of the above, in cases where goods are manufactured by job worker out of raw materials received from a person or a manufacturer and where the relationship between the raw material supplier and the job worker is on principal to principal basis, the job worker will be the actual manufacturer. The question as to whether the relationship between the raw material supplier and the job worker is on principal to principal basis will depend on the relevant facts and circumstances of the case. The relationship could be ascertained with reference to facts such as whether the job worker has received any financial assistance from the supplier of the raw material, whether the supplier of the raw material exercises any control over the management of the affairs of the job worker and whether the job worker is an independent entity and not merely a dummy or an agent of the raw material supplier. If it is found that the job worker is an independent entity and carries out the manufacturing activities independently and is not an agent, of the raw material supplier or a dummy, then the job worker will be treated to be a manufacturer.
5. The Board has also considered the terms “raw material supplier” and “job worker”. The “Raw material supplier” includes a person who supplies raw material to the job worker to manufacture products or to undertake any process incidental or ancillary to the completion of a manufactured product or to do anything which is specified under the Central Excise and salt Act 1944, in relation to any goods as amounting to manufacture. “Job worker” includes a person or a manufacturer who manufactures a product or undertakes any process incidental or ancillary to the completion of a manufactured product or does anything which is specified under the said Act in the relation to any goods, as amounting to manufactured from the raw material supplied by the other person.
6. The above principles may be kept in mind while assessing the goods.