1. Sometimes it happens that a registered supplier sending the goods for job work asks the job worker to retain the scrap generated after the said job work. Job worker shall thus sell the said scrap and keep the consideration with himself. In addition to the said amount, job worker shall also charge the agreed price to the registered supplier for the job work charges. Assuming that the job worker is not related to the registered supplier and is also registered under GST, he shall levy the tax on the job charges invoiced by him. Therefore the issue for the present article is whether the job worker is required add the value of scrap, retained by him, to the price charged by considering the same as a “consideration” for the supply of job work services ?
2. 9(1) of the Central Goods & Services Tax (“CGST”) Act, 2017 provides for levy of tax on the value determined u/s 15 of the said Act. Sec. 15(1) provides as under:
“15. (1) The value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply.”
3. Sec. 15(4) further provides that where the value of supply cannot be determined u/s 15(1), the same shall be determined in the manner prescribed. The manner for determination of such value for the issue before us is prescribed under Rule 27 of the CGST Rules, 2017. Said rule provides that where the “consideration” is not wholly in money, the value of supply shall be –
(a) be the open market value of such supply;
(b) if the open market value is not available under clause (a), be the sum total of consideration in money and any such further amount in money as is equivalent to the consideration not in money, if such amount is known at the time of supply;
(c) if the value of supply is not determinable under clause (a) or clause (b), be the value of supply of goods or services or both of like kind and quality;
(d) if the value is not determinable under clause (a) or clause (b) or clause (c), be the sum total of consideration in money and such further amount in money that is equivalent to consideration not in money as determined by the application of rule 30 or rule 31 in that order.
4. Combined reading of the above provisions provides that where the price is not the sole consideration of the supply, the value shall be determined u/s 15(4) of the CGST Act, 2017 read with Rule 27 of the CGST Rules, 2017. Therefore can we say that the scrap retained by the job worker is a “consideration” in kind and thus the price (i.e. job work charges) charged is not the sole consideration of supply and hence transaction value cannot be accepted ?
5. Rule 27 starts with the phrase “where the supply of goods or services is for a consideration not wholly in money”. Hence the moot question before us is whether the scrap retained by the job worker can be considered as a “consideration” ?
6. Word consideration is defined u/s 2(31) of the CGST Act, 2017. Relevant portion is reproduced below :
“Consideration in relation to the supply of goods or services or both includes––
(a) any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government;”
7. Clause (a) of the above definition thus provides that any payment whether in money or otherwise, “in respect of”, “in response to” or “for the inducement” of the supply in question shall be considered as a consideration. In this background, can scrap retained by job worker be considered as a “consideration” ?
8. No businessmen would ideally allow the job worker to retain the scrap and also not consider the same while deciding the job work charges unless the value of scrap is immaterial. Hence the registered supplier would have considered the fact that the job worker will get benefited with the scrap generated at his end and to that extent the value of job work charges will be adjusted. In such scenario the value of scrap generated will indeed be included as a consideration “in respect of”, “in response to” or “for the inducement” of the supply of job work services.
9. And this is what Apex Court held in the case of General Engineering Works Versus Commissioner of Central Excise (2007) 212 ELT 295 (SC). Apex Court in the case of Ujagar Prints v/s. Union of India (1989) 39 ELT 493 (SC) had held that the assessable value of goods cleared by the job worker shall include the cost of material and the processing charges of the job worker. In this case one of the issue was whether the “processing charges” of the job worker shall include the value of scrap retained by the said job worker (we shall not advert to other issues of the said ruling since the same are not relevant for the present issue). The Court held as under:
“It must be clarified that the value of scrap would be included in the value of the points and crossings only in case where it is shown that the conversion charges get depressed by the fact that the processor is allowed to keep and sell the scrap. ——- If the conversion charges are not depressed or if the scrap/waste is returned then, their value will not get added.
The burden of proving that the price is so depressed would be on the Revenue. But one of the methods of proving it would be through the contract between the parties itself. In this case the contract is on record. The contract provides as follows: –
“The prices quoted are based on the free supply of Rails by you at our works, Bharatpur, Western Railway, Rajasthan. The tonnage for Rails will be 5% more than the net requirement of Rails required for different items of Switches, 5% being the manufacturing wastage.
The total requirement of Rails for different items would be forwarded to you within ten days of receipt of your formal order. Manufacturing wastage of 5% has been considered and therefore this wastage will not be separately accounted for and shall not be returned. Any surplus materials received from you against the contract, will be returned to you and dispatched to the destination as advised by you, F.O.R. Our word.”
Thus, the contract clearly indicates that the price (conversion charges) have been worked out on the basis that 5% wastage would be available to the Appellants. This indicates that the price has been affected by the sale of scrap. In this view, we are in agreement with the view of the Tribunal that in computing the value of points and crossings the value of scrap sold has to be taken into account.”
10. In another case before the Apex Court (, Nagpur v. Lloyds Steels Industries Limited (2007) 213 E.L.T. 339 (S.C.))on the same issue the Court followed the above referred ruling since the contract clause provided as under:
“(a) Conversion charges are applicable on CR output waste of CR coils including 1.5% unrolled/semi-rolled material going along with the CR FH coil. The conversion charges are with due consideration of scrap credit after reduction of estimated salvage value.”
11. Hence in cases where the contract envisages the scrap to be retained by the job worker and the job work charges are adjusted on this account, the value of actual scrap generated shall be treated as a consideration and GST shall be leviable. The valuation of said scrap shall be done as per Rule 27 (supra)of the CGST Rules, 2017.
12. However, in cases where the contract does not envisage the scrap to be retained by the job worker and still job worker retains the scrap (normally of insignificant amount) we are of the view that the same cannot be considered as a consideration since the same is never factored while determining the job work charges.
13. Thus the manner of determination of the job work charges and the contractual clauses shall be the base for deciding whether the value of scrap shall be treated as a “consideration”.
14. Before we part, it may also be noted that if the value of scrap is treated as a consideration it will be taxed not only in the hands of the job worker but also in the hands of the registered supplier. This is because Sec. 7(1)(a) of the CGST Act, 2017 construes any supply of goods by way of barter in the course or furtherance of business as a transaction leviable to tax. Hence the registered supplier sending the goods for job work and allowing the job worker to retain the scrap will be considered as having passed the property in goods (viz. scrap) to the said job worker. Hence even registered supplier will have to prepare a tax invoice for the value of scrap retained by the job worker. At the end of day, it will indeed be revenue neutral but what to do. One will have to do the paperwork to avoid getting caught by the officers on the wrong foot.