Service Tax Exemption to Intermediate Production Processes

Dr. Sanjiv Agarwal, FCA, FCS

Certain job work and production processes have been exempted from service tax. Carrying out an intermediate production process as job work in relation to –

(a) agriculture, printing or textile processing;

(b) cut and polished diamonds and gemstones; or plain and studded jewellery of gold and other precious metals, falling under Chapter 71 of the Central Excise Tariff Act, 1985.

(c) any goods excluding alcoholic liquors for human consumption, on which appropriate duty is payable by the principal manufacturer; or

(d) processes of electroplating, zinc plating, anodizing, heat treatment, powder coating, painting including spray painting or auto black, during the course of manufacture of parts of cycles or sewing machines upto an aggregate value of taxable service of the specified processes of one hundred and fifty lakh rupees in a financial year subject to the condition that such aggregate value had not exceeded one hundred and fifty lakh rupees during the preceding financial year;

are exempt from Service Tax vide Notification No. 25/2012-ST dated 20.06.2012 w.e.f. 1.7.2012.

For this purpose,

“Principal manufacturer” means any person who gets goods manufactured or processed on his account from another person as per definition clause 2(z) of Notification No. 25/2012- ST, dated 20.06.2012.

“Appropriate duty” means duty payable on manufacture or production under a Central or a State Act, but shall not include ‘Nil’ rate of duty or duty wholly exempt. “Principal manufacturer” means any person who gets goods manufactured or processed on his account from another person.

This exemption shall be available where excise duty is payable on final products and job works are in relation to agriculture, printing etc as specified. This category covers specific job workers and processes.

Job work means processing or working upon of raw materials or semi finished goods supplied to job worker, so as to complete a part or whole of the process resulting in the manufacture or finishing of an article or any operation which is essential for the aforesaid process. Cenvat Credit Rule 4(5)(a) also provides that intermediate product can be manufactured by a job worker.

It may be noted that:–

(i) If activity is ‘manufacture’, then provisions of Central Excise or State Excise law apply and Service Tax will not be applicable.

(ii) If the principal manufacturer sends material to job work under provisions of Cenvat Credit Rule 4(5)(a), then job worker is neither liable for Service Tax nor for Central Excise.

(iii) If the principal manufacturer is exempt from Central Excise for any reason, then job work may not be exempt.

(iv) Job work relating to agriculture, printing, textile processing, diamonds and gem stones are exempt.

(v) Job work in relation to processes of electroplating, zinc plating, anodizing, heat treatment, powder coating, painting during the course of manufacture of parts of cycles or sewing machines subject to monetary limits.

(vi) Other job works shall be subject to levy of Service Tax.

Any process amounting to manufacture or production of goods is in the negative list. If process does not amount to manufacture or production of goods, and is further not covered in clause 30 of the mega notification, the same shall be liable to service tax.

Amendment w.e.f. 01.06.2015 (Vide Notification No. 6/2015-ST dated 1.3.2015)

Exemption to intermediate production process for any goods shall be curtailed (clause 30c). The words, ‘any goods’ have been substituted for ‘any goods excluding alcoholic liquor for human consumption’. Thus exemption will not be available to any goods and production process for alcoholic liquour meant for human consumption shall become taxable. This has been done in line with amendment in negative list [section 66D (f)] as the negative list entry of service by way of any process amounting to manufacture or production of goods has been pruned to exclude any service by way of carrying out any processes for production or manufacture of alcoholic liquor for human consumption.

Consequently, Service Tax shall be levied on contract manufacturing/job work for production of potable liquor for a consideration. In this context, the definition of the term “process amounting to manufacture or production of goods” [section 65 B (40)] has been amended. Consequent to imposition of Service Tax levy on service by way of manufacture of alcoholic liquor for human consumption, an amendment has been made in the entry at S. No. 30 of Notification No. 25/12-ST to exclude carrying out of intermediate production process of alcoholic liquor for human consumption on job work from this entry.

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