GST update on part 5 of advance ruling decision in case of M/s JSW energy ltd.

In our earlier updates, we have deliberated upon various issues that were discussed at length in the Advance Ruling pronounced in the case of M/s JSW Energy Ltd. Finally, we discuss the vital question that has arisen from the decision of AAAR by placing reliance on the Apex Court decision of M/S PRESTIGE ENGINEERING (INDIA) VS COLLECTOR OF C.EX., MEERUT [1994 (73) E.L.T. 497 (S.C.)]. In nutshell, it has been concluded that in order to consider an activity as ‘job-work’, minimal addition of materials is required to be done by the job-worker. Now, the question arises is whether reliance placed on the Supreme Court decision that was rendered in erstwhile regime can be made applicable in the GST regime? There has been material departure in the indirect taxation laws with the introduction of GST regime as now there is one tax for Goods and Services. Moreover, the concept of ‘composite supply’ has been introduced which was not prevalent in the earlier laws.

It is worth noting that as per entry no. 3 of Schedule II, ‘Any treatment or process which is applied to another person’s goods is a supply of services’. It is submitted that ‘job-work’ is considered as ‘service’ under the GST Law. Now, the question that arises is whether the addition of materials is substantive factor determining the activity as job work or not as stated in the Apex Court decision stated above? Also, whether the concept of ‘composite supply’ as defined in section is applicable in case of activities specified in Schedule-II?

It is submitted that in our opinion, since the ‘job work’ is considered as service under GST Law, the quantum of addition in the form of materials by the job-worker cannot be determinative factor for considering an activity as ‘job-work’. To illustrate, construction of complex is considered as ‘service’ under entry no. 5 of the Schedule-II but practically it is observed that substantial material is added during the course of providing such service. Consequently, merely because substantial material is added does not lead to conclusion that the activity is supply of goods and not that of service. If any activity is considered as service then the GST is to be applied accordingly and the quantum of materials cannot alter the situation.

It is further submitted that although the concept of ‘composite supply’ will not come into picture in case of job-work, even otherwise, in our opinion, the decision of Apex Court which has been rendered in the erstwhile Central Excise Laws cannot be made applicable in the GST regime. Even we have referred some decisions where it is clearly held that decision of Supreme Court is applicable for notification 119/75 and not on all the job work provision. It is submitted that as per the concept of ‘composite supply’, the GST is to be levied according to the GST rate applicable to the principal supply. For example- in case of repairing of car on a lump sum amount in a composite contract, the entire transaction will be treated as repair and maintenance service even though the material portion is around 80% as the principal supply is that of repairing of motor vehicle. Similarly, in case where there is accommodation package including breakfast, the transaction is leviable to GST as applicable for accommodation service being the principal supply. It is also pertinent to mention that the value is not relevant and rather the dominant nature of the transaction is important. Say for example, in case of organisation of function, the charges for hall may be Rs. 5,00,000/- while that of supply of food may be Rs. 10,00,000/- being substantial value in monetary terms but inspite of this, the transaction would be considered as ‘Mandap Keeper Service’ and not that of ‘Supply of food and beverages’. Similarly, if a person has undergone a heart surgery and stent has been used which has major cost of total package. Then also, the principal supply is health care services and it cannot be termed as supply of material considering the value of goods. Therefore, this analogy can be applied in case of job-work also and the applicability of Apex Court decision in GST regime is certainly doubtful. This is for the reason that it is possible that the value of materials used by the job-worker is substantial but still the process is to be considered as ‘job-work’ being service and not supply of goods.

Well, the AAAR has infused a new point for litigation as regards the job-work activity is concerned which may adversely effect the job-workers particularly of textile industry where most of the processes are outsourced to job-work. In such situations, revenue authorities may dispute the activities to be ‘job-work’ on the grounds that substantial additions in the form of material have been done which is not permissible. But from above, it is clear that law pertaining to excise law cannot be applied in GST regime. The complete concept has changed in GST and concept of principal supply has been introduced. But this concept was not prevailing in Central Excise regime.

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GST update on part 5 of advance ruling decision in case of M/s JSW energy ltd.

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