Distributing happiness
to outsourced
manufacturing process/job work
By Debasish Bandyopadhyay, B.Com, LL.B, PGDFM
Manager- Taxation, Khadim India Limited
There are numerous reasons for outsourcing
production by the manufacturing companies, but the key element for deciding in
favour of outsourcing or job work normally boils down to one thing, cost
reduction. In the budget-2016, many procedural
restructurings have been introduced in the area of job-work vide notification
no. 13/2016-CE, dated 1st March, 2016, giving a much needed relief to
the assessee engaged in or related to such process of outsourcing.
One of such significant amendment brought about in the budget-2016 is to allow the distribution of CENVAT credit by the Input Service Distributor to an outsourced manufacturing unit. Necessary amendment has been made in Rule 7 of the CENVAT credit rules, 2004 in the manner of distribution of credit facilitating allocation of credit to outsourced manufacturing units or job workers. For the purpose of the said Rule, Explanation 4, has been suitably appended to define such ‘outsourced manufacturing units’ as under;
“Outsourced manufacturing unit means a job-worker who is liable to pay duty on the value determined under rule 10A of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 on the goods manufactured for the input service distributor or a manufacturer who manufactures goods, for the input service distributor under a contract, bearing the brand name of such input service distributor and is liable to pay duty on the value determined under section 4A of the Excise Act.”
The above change may be seen as an accord to a long standing demand by the industry for making a level playing field for the outsourced manufacturing or job work process to share the input service credit but this mechanism of distribution of credit may not be such smooth and sacred considering the track record of implementation of statutory provisions in the field of taxation in India. The said distribution of credit to outsourced manufacturing unit or job worker is allowed subject to, inter alia, the following condition;
The outsourced manufacturing unit/ job worker shall maintain separate account of credit received from each of the input service distributors and shall use it for payment of duty on goods manufactured for Input Service Distributor concerned.
It is also prescribed that provisions of Rule 6 of CENVAT credit rules, shall apply to the units manufacturing goods (including the premises of an outsourced manufacturing unit) or provider of output service and shall not apply to the input service distributor. Thus, the obligation to make reversal under Rule 6(3) of the said Rule, is on the outsourced manufacturing unit or job worker, thereby rendering the said process of taking CENVAT credit by the job worker complex, ambiguous and prone to litigation.
Of all the aforesaid conditions, the rider of maintaining separate account for credit received from each of the input service distributors towards payment of duty on goods manufactured for Input Service Distributor concerned, may create the said process a breeding ground for infamous theatres of litigation in indirect taxes. In fact, the area of job work has long been mired in disputes leading to huge litigation in the field. There are numerous instances of disputes on the issue of availability of CENVAT credit by jobbers as well as on receiving of input services credit through input service distributors by the principal manufacturer to jobbers.
The said amendment in the manner of distribution of credit to include outsourced manufacturing unit or job worker as a consequence of many judicial pronouncements on the issue as well as long overdue step in encouraging the momentum of ease of doing business in indirect taxes. It is important to note that in absence of proper safeguard and effective implementation by the filed formations, the instant exercise may yield precious little with regard to government’s intent on procedural simplification. On the issue of eligibility of input services received by Job-worker through input service distributor, in the matter of Sunbell Alloys Co. of India Ltd. vs. Commr. of C. Ex. & Cus., Belapur 2013-VIL-68-CESTAT-MUM-CE, the Hon’ble CESTAT, Mumbai held as follows;
“In the present case, the input service distributor scheme under CCR, 2004 envisages distribution of input service tax credit by an office of the manufacturer to its own manufacturing units. There is no ambiguity in the wordings of these provisions in the CCR, 2004. If that be so, we need not go into the purpose and object of the scheme or the Finance Minister’s speech to ascertain the scope of the provisions. It would also be pertinent to note that input service distribution is a special scheme or a special facility made available subject to certain conditions. Normally, a manufacturer or producer receives the service in his own factory; input service distribution scheme provides for receipt of input services at the head office of the manufacturer so that credit can be distributed. And this is subject to the condition that the credit is distributed by the manufacturing unit’s head office/office and the distribution has to be made among the various manufacturing units belonging to the same entity. The scheme does not envisage distribution of credit to manufacturing units belonging to others……………………..”
Accordingly, based on the above observations, input service credit was denied to job worker. The matter is being pending with the Bombay High Court where the appeal is admitted on certain substantial questions of law. These sort of issues are being permanently put to rest by the present amendment in Rule 7 of CENVAT credit rules, 2004.
There are many disputes on the topic of distribution of credit by Input Service Distributor, like in the matter of Doshion Ltd. vs. C.C. Ex, Ahmedabad 2012-VIL-35-CESTAT-AHM-CE it was held by the Hon’ble CESTAT, Ahmedabad that the omission to take registration as Input Service Distributor can at best be considered as procedural irregularity. There is no prescribed requirement under CENVAT credit scheme that credit can only be availed and distributed after obtaining an input service distributor registration.
Further, in the case of Commissioner v. Chandresh C. Shah 2015 (38) S.T.R. J275, the Apex court has maintained that omission to take registration as Input Service Distributor was a case of procedural irregularity and was required to be considered sympathetically.
In a welcome move towards reducing litigation and giving a boost to the endeavour of ease of doing business, the said amendments in CENVAT credit rules, is expected to have a far reaching impact on the trade. It seems that the said amendment will sow the seeds of happiness in the turf of outsourced manufacturing process but considering the history of litigation/disputes on the area of taking CENVAT credit by job worker, it is highly advisable that necessary procedural as well as statutory issues are being cautiously dealt with.
In fact, job work is one of the most complex area in the domain of indirect taxes contributing considerable slice of litigation to the total kitty of indirect tax litigation in India. In certain industry, considering the intricate nature of the process, it is very difficult and taxing in normal circumstances to reconcile the inputs sent under job work with the finished goods received back within prescribed timeline leading to many audit objections and ensuing litigations. After the instant amendment in CENVAT credit rules, compliance in connection with conditions for distribution of credit, registration in input service distributor, necessary reversal of credit mandated under Rule 6 of CENVAT credit rules, are going to be the subject matter of paramount importance in the field of job work. In the event of failed or inadequate implementation of the amended provisions may distribute tension instead of happiness in the trade of outsourced manufacturing or job work resulting into opening a Pandora’s Box of litigation. It is also expected that the Departmental officers should deal with the said amended provisions of CENVAT Credit Rules, with due caution and responsibility.
Disclaimer: Views expressed are strictly personal. The content of this document are solely for informational purpose and it doesn’t constitute professional advice or recommendation.