Part 1 GST update on the case of M/s JSW Energy Ltd. dated 02.07.2018

The latest decision pronounced by the Maharashtra Appellate Authority for Advance Ruling in the case of M/s JSW Energy Ltd. vide Order No. MAH/AAAR/SS-RJ/01/2018-19 dated 02.07.2018 has been topic for discussion, particularly for the assessees availing the services of job worker. The brief facts of the case along with the reasoning are summarized as follows:

(Refer Chart Attached)

M/s JSL is sending coal to M/s JEL for generation of electricity. M/s JEL uses its own goods such as air, water for generation of electricity and sends the electricity to Maharashtra State Electricity Distribution Company Ltd. (MSEDCL). The electricity is thereafter supplied by MSEDCL to M/s JEL.

In nutshell, the issue under consideration is that whether the arrangement wherein JSL supplies coal to JEL for generation of electricity which is being received by JSL through MSEDCL amounts to job-work under section 143 of the CGST Act, 2017?
Reasoning adopted by Maharashtra Appellate Authority for Advance Ruling (AAAR) is summarized as follows:-
1. The AAAR rejected the reasoning adopted by the authority for advance ruling that since the conversion of coal into electricity amounts to manufacture as a new and distinct product emerges, the said activity cannot be considered as job-work under GST regime. The AAAR concluded that job work covers all types of processing whether or not the process amounts to manufacture.

2. It was held that the arrangement is not a job work as it does not satisfies the conditions required for treating an activity as job work under section 143 of the CGST Act, 2017. It was held that for considering an activity as job-work, it is essential that JSL sends goods to the job worker (JEL) which are either inputs or capital goods for JSL. In the present case, it was concluded that JSL procures coking coal and steam coal but it is a known fact that only coking coal is used by JSL for manufacturing steel and steam coal is exclusively used for generation of electricity through JEL. Consequently, it was held that steam coal cannot be considered as input for JSL. Moreover, it was further held that even if it is assumed that the steam coal is being used for generation of electricity which is being used by JSL for manufacturing steel, then too, the inputs being coal sent by JSL was not returned after job work by JEL to JSL. The electricity generated was sent to MSEDCL which in turn was supplied to JSL. Therefore, it was held that since third party was involved rather than two parties in a job work- one being principal and other being job-worker, the condition of section 143 was not satisfied. Therefore, it was held that the arrangement cannot be considered as job-work.

3. The AAAR also placed reliance on the Apex Court decision given in the case of M/s Prestige Engineering (India) Vs Collector of C.Ex., Meerut [1994 (73) E.L.T. 497 (S.C.)] to deny the present arrangement as job-work on the grounds that job-work envisages minimum addition in the form of material and if substantial material is being added during the course of processing by the job-worker, then the activity cannot be construed as job-work. For example, a tailor stitching a shirt from the cloth provided to him by customer will be covered by the term job-work as he is only adding thread, buttons to the shirt which are not substantial addition of goods during the process of stitching. This portion of reasoning given by AAAR has far reaching impact as it seeks to change the very perception of job-work in the GST regime. According to this reasoning, if substantial goods are used by job-worker during the course of processing, then the activity cannot be construed as job-work.

The moot question arises is that whether the decision of the Apex Court in the Prestige Engineering (India) Ltd. rendered in the context of job-work with respect to erstwhile Central Excise Law can be made applicable in the GST regime? We will discuss this aspect and certain other aspects related to job-work in the context of provisions contained in GST regime in our next update.

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Part 1 GST update on the case of M/s JSW Energy Ltd. dated 02.07.2018

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