“Manufacture or production of goods” – an exemption or a litigation in negative list

An article by:-
CA. Pradeep Jain
CA. Preeti Parihar

Introduction:-
Exemptions and beneficial amendments are always prone to litigation – whether it is due to ambiguous language or due to creative interpretational skills of Revenue officers. Whatever be the reason, the departmental authorities are always less interested in extending the benefit of exemptions to the assessees. One such beneficial provision is being inserted in the negative list which exempts the processes that amount to manufacture or production from the levy under service tax. This piece of diction is about probable litigation on this item of negative list.

Processing, Production & Manufacture – slight margin of difference:-

The term ‘production’ is defined as an act of conversion of raw materials into useful materials to satisfy human needs. It can also be defined as a process which transforms raw material into semi-finished or finished goods. Further there are three words often used interchangeably – “processing”, “production” and “manufacture”. Every activity which brings change in which input material – whether or not visible, is a “process”. Every process which leads into a substantial change (whether or not that change makes the goods a distinct, distinguishable and differently known commodity in the market), is “production” and every production which leads into transformation of goods, i.e., the resultant product has different name, character and use; is “manufacture”. Of the three, the later two – “production” and “manufacture” are dealt herein.

Past provisions:-
Under old scheme of service tax by way of positive list, the service tax was levied on the job work under Business auxiliary services. The taxable services related to job work under this category was explained as “production or processing of goods for, or on behalf of, the client”. Simultaneously, any activity that amounted to manufacture of excisable goods was excluded from this definition. Thus, any processing or production of goods for or on behalf of the client were liable to service tax unless that process amounted to manufacture under section 2(f) of the Central Excise Act, 1944.

Provisions under negative list:-
The negative list is prescribed under section 66D of the Finance Act. Entry no. (f) therein says that no service tax shall be payable on:-
“(f) any process amounting to manufacture or production of goods;”
Thus, under this entry if the process amounts to “manufacture” or “production” of goods, it will be exempt from payment of service tax. In this entry, two words are used - "manufacture” or “production” of goods. The word ‘manufacture’ is defined under section 2(f) of the Central Excise Act, 1944. But the word ‘production’ is not defined anywhere in the Act. However, various judicial pronouncements have been given from time to time to explain this term.

Rulings on the term “production”:-
·        In the case of Commissioner of Income Tax, Kerala v. Tara Agencies - 2007 (6) SCC 429, the Hon’ble Supreme Court observed that the expression “produced” was given a wider meaning than the word “manufacture”. It was held that the word “produce” or “production” when used in context of “manufacture” will include every process which brings into existence new goods, which may however may or may not amount to manufacture.

·        In the case of Commissioner of Income Tax v. Hindustan Metal Refining Works (P) Ltd. - (1981) 128 ITR 472 (Calcutta), hon’ble Calcutta High Court held that both the words “manufacture” and “production” apply to bringing into existence something new, which was different from its components. Thus, it was interpreted that if any activity has been held as not amounting to manufacture, the same will not be “production” also.

·        PSL CORROSION CONTROL SERVICES LTD. Versus COMMR. OF C. EX. & CUS., DAMAN [2008 (12) S.T.R. 504 (Tri. - Ahmd.)]:-

This decision is related to “Business Auxiliary services” as existed prior to 1.7.2012. In this case, the Revenue raised the demand under BAS by saying that as their process didn’t amount to manufacture, it is covered under the purview of “production”. It is reiterated that the service tax under BAS was leviable on the activity “production or processing on behalf of the client” provided it doesn’t amount to manufacture. On the other hand assessee argued that the “production” should lead to emergence of a new commodity which is not the case there. Both the above two decisions of hon’ble Apex Court and High Court were discussed by hon’ble Tribunal and while affirming to the decision of hon’ble Apex Court, it was held that the expressions ‘production’ and ‘manufacture’ are not synonymous with each other, though they may be used interchangeably by a layman. However, the expression “production of goods” as held taxable under BAS may be an activity which leads to a change in the commodity which may not amount to manufacture in terms of Section 2(f) of Central Excise Act. It was further held that every production may not necessarily amount to manufacture but every manufacture would be covered by the expression ‘production’. It was thus held that the ‘production of goods’, which may not amount to manufacture in strict sense of Section 2(f) would also be covered by the said category of services. It was further held in this case as follows:-

“The use of different expression i.e. “production of goods” which may not amount to manufacture, by the Legislature, in its wisdom, only throws light upon the Legislative intent that the ‘production’ activity which may not be covered by Section 2(f) and may not be liable to pay excise duty in terms of that Act would get covered by the definition of “Business Auxiliary Service”.

Thus, in above decision of hon’ble Tribunal, the demand under BAS was confirmed on the “production of goods” which did not amount to manufacture of goods under section 2(f) of the Central Excise Act, 1944.

Analysis of ruling with advent of negative list:-

The taxable event under BAS in positive list was “production or processing of goods for or on behalf of client”. The judicial pronouncements held that the production of goods will also be taxable even if there is no substantial change in the commodity so as to constitute “manufacture” in terms of section 2(f) of CEA as the words “production of goods” is also specified in the taxable service of BAS. Now, the same expression “production of goods” has been brought parallel to “manufacture of goods” in the negative list. The phrase is the same “production of goods” but the context in which it is kept is different – in the positive list era, this phrase was used as a taxable event, however, in the negative list, the same phrase has been used as an exempting phrase. Now, the question is whether the same department will interpret the same phrase in the same manner?

“Production of goods” – whether SC rulings above will be followed:-

The manufacture is already exempted from service tax right from the era of positive list and continued in negative list. If the “production of goods” also gets exemption under negative list, almost every process will get exemption from service tax. Normally, the processes outsourced are those process which involved substantial amount of man, power and techniques; naturally, these will definitely amount to “production” even though may not be manufacture in terms of section 2(f) ibid. As such, almost every process sent on job work will lead to “production of goods” which was taxable under positive list if not amounted to manufacture. The inclusion of word “production” in the negative list has drastically increased the scope of exemption contained therein and reduced the scope of service tax on job work as compared to positive list. As such, department will not accept the same so easily. Though the language of exemption is clear and unambiguous, yet the “intention of legislation” is the ultimate tool which is very often used by the department in such cases. It can be contended that the intention of government is not to exempt the job works normally, only the processes amounting to manufacture are exempted. Further, the word “production” is not defined anywhere, as such; the department will not accept any process as “production” so liberally.

Another side of the coin:-

Under negative list era, “specified intermediate processes” are exempt under serial no. 30 of mega exemption notification no. 25/2012-ST dated 20.6.2012. The opening phrase of this entry reads as follows:-

“30. Carrying out an intermediate production process as job work in relation to –“
Thus, the mega exemption notification exempts the “intermediate production process”. Here, the word used is “intermediate production process” which represents any process in midway to final process, i.e. the process which will result into semi finished goods. There may be cases where after carrying out the job process, the goods are cleared from the premises of the job worker only under the provisions of rule 4(6) of the Cenvat Credit Rules, 2004. In such cases, whether the exemption under above serial no. 30 will be applicable? In our view, in such cases, this exemption will not be applicable as removal from the premises of job worker indicates that the goods have undergone final production process and are the finished goods. Since the exemption contained under this serial no. is applicable only on the “intermediate production process”, this exemption will not be applicable on the goods removed under provisions of rule 4(6) of the Cenvat Credit Rules, 2004. However, here the negative list can save the job workers; which exempts “any process amounting to manufacture or production of goods;”. Thus, if the job worker not carrying out any intermediate production process, rather he is carrying out a final processing, he may get exemption under the negative list if the process carried out by him amounts to production of goods; provided the departmental authorities don’t have any objection on the same.

While winding up:-

The language contained in the negative list is “any process amounting to manufacture or production of goods” – is plain, clear and unambiguous. Thus, it can be concluded that even if the process does not amount to manufacture under section 2(f) of the Central Excise Act, but it brings substantial change in the inputs, the same will be covered by this exemption. The impact of this entry in the negative list will be critical one where the goods are removed from the job worker’s premises under provisions of rule 4(6) of the Cenvat Credit Rules, 2004. However, there is no doubt about the fact that the departmental authorities are more often reluctant to extend the intended benefits to the assessees. Let’s see, how the creative interpretations of the Revenue officers forbid this benefit to the assessees.

Comments

DEBASHIS BASU on 21 August, 2012 wrote:

Processing is production, only when such processing leads to distinctly identifiable characteristic changes in the items processed. For example, processing of ingot in steel plant is production but processing of coal in coal washery is not production. When there is production, there is change in character of the processed materials or items or goods which are being transformed into some new identity not in existence by the time when the production process started. Technically there should be no difference between production and manufacture and that’s a reality in technical jargon in which the terms are frequently being used interchangeably. If there is change which does not make the goods, a distinct, distinguishable and differently known commodity in the market, it can not be said as substantial change and as such it can not be termed as production. Whenever there is distinct, distinguishable and differently known commodity, it is a product with different name, character and use and as such there is transformation. Hence we should not differentiate between production & manufacture. The past provision itself was clumsy as sec.2 (f) of the Central Excise Act, 1944 explains manufacture as under “manufacture" includes any process,- (i) incidental or ancillary to the completion of a manufactured product; (ii) which is specified in relation to any goods in the Section or Chapter notes of the Schedule to the Central Excise Tariff Act, 1985 as amounting to manufacture, (5 of 1986). and the word" manufacturer" shall be construed accordingly and shall include not only a person who employs hired labour in the production or manufacture of excisable goods, but also any person who engages in their production or manufacture on his own account;]. It’s Worth noting that Sec 2(f) (II) has made no distinction between "production or manufacture" in its content, implying that the department originally was in no mood to distinguish production from manufacture. If manufacture is not distinguished or differentiated from production, then how it is possible that "any processing or production of goods for or on behalf of the client were liable to service tax unless that process amounted to manufacture" because we can replace the word "production" by " manufacture" and in that case taxable services related to job work should be explained as “production / manufacture or processing of goods for, or on behalf of, the client” and how then any activity that amounted to manufacture of excisable goods can be excluded from this definition. This concept is confirmed by "The negative list” prescribed under section 66D of the Finance Act, of which Entry no. (f) Says that no service tax shall be payable on:- “(f) any process amounting to manufacture or production of goods;” ………………….. No differentiation between manufacture and production is confirmed by the Act itself. Thus, under this entry, if the process amounts to “manufacture” or “production” of goods, it should be exempt from payment of service tax. This view confirmed by "Commissioner of Income Tax v. Hindustan Metal Refining Works (P) Ltd. - (1981) 128 ITR 472 (Calcutta)", in which the Hon’ble Calcutta High Court came to conclusion that if any activity has been held as not amounting to manufacture, the same will not be “production” also. However in the case "PSL CORROSION CONTROL SERVICES LTD. versus COMMR. OF C. EX. & CUS., DAMAN [2008 (12) S.T.R. 504 (Tri. - Ahmd.)]", Hon’ble Tribunal held that manufacture and production are not synonymous and held further that that every production may not necessarily amount to manufacture but every manufacture would be covered by the expression ‘production’. Drawing reference to the fact that “Legislative intent that the ‘production’ activity which may not be covered by Section 2(f) and may not be liable to pay excise duty in terms of that Act would get covered by the definition of “Business Auxiliary Service”, it can be implied that the exchequer wants to earn revenue from the taxpayer in any form whether it's service tax or excise duty. Though the intention itself is not questionable, the manner of its implementation due to the degree of complexity involved in the legislative formulations is definitely questionable. So far as the new negative list era is concerned, it is true that both production and manufacture whether they are interchangeably useable or not are exempted from the purview of service tax. However so far as job work is concerned, serial no. 30 of mega exemption notification no. 25/2012-ST dated 20.6.2012, says, “Carrying out an intermediate production process as job work in relation to –“; here the word “as” is significant because the specific phrase may be construed as one having relevance to the principal manufacturer to whom the “production process as job work” is intermediate which in turn leads to the final phase of completion of the production process. It’s beyond doubt that the departmental authorities are more than reluctant to extend benefits to the assessees; hence it can be well assumed that goods when cleared by job worker as per provisions of rule 4(6) of the Cenvat Credit Rules, 2004, the exemption under “mega exemption serial no. 30” will be applicable? Thanks and regards CMA Debashis Basu dbsshbs@gmail.com

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DEBASHIS BASU on 21 August, 2012 wrote:

Processing is production, only when such processing leads to distinctly identifiable characteristic changes in the items processed. For example, processing of ingot in steel plant is production but processing of coal in coal washery is not production. When there is production, there is change in character of the processed materials or items or goods which are being transformed into some new identity not in existence by the time when the production process started. Technically there should be no difference between production and manufacture and that’s a reality in technical jargon in which the terms are frequently being used interchangeably. If there is change which does not make the goods, a distinct, distinguishable and differently known commodity in the market, it can not be said as substantial change and as such it can not be termed as production. Whenever there is distinct, distinguishable and differently known commodity, it is a product with different name, character and use and as such there is transformation. Hence we should not differentiate between production & manufacture. The past provision itself was clumsy as sec.2 (f) of the Central Excise Act, 1944 explains manufacture as under “manufacture" includes any process,- (i) incidental or ancillary to the completion of a manufactured product; (ii) which is specified in relation to any goods in the Section or Chapter notes of the Schedule to the Central Excise Tariff Act, 1985 as amounting to manufacture, (5 of 1986). and the word" manufacturer" shall be construed accordingly and shall include not only a person who employs hired labour in the production or manufacture of excisable goods, but also any person who engages in their production or manufacture on his own account;]. It’s Worth noting that Sec 2(f) (II) has made no distinction between "production or manufacture" in its content, implying that the department originally was in no mood to distinguish production from manufacture. If manufacture is not distinguished or differentiated from production, then how it is possible that "any processing or production of goods for or on behalf of the client were liable to service tax unless that process amounted to manufacture" because we can replace the word "production" by " manufacture" and in that case taxable services related to job work should be explained as “production / manufacture or processing of goods for, or on behalf of, the client” and how then any activity that amounted to manufacture of excisable goods can be excluded from this definition. This concept is confirmed by "The negative list” prescribed under section 66D of the Finance Act, of which Entry no. (f) Says that no service tax shall be payable on:- “(f) any process amounting to manufacture or production of goods;” ………………….. No differentiation between manufacture and production is confirmed by the Act itself. Thus, under this entry, if the process amounts to “manufacture” or “production” of goods, it should be exempt from payment of service tax. This view confirmed by "Commissioner of Income Tax v. Hindustan Metal Refining Works (P) Ltd. - (1981) 128 ITR 472 (Calcutta)", in which the Hon’ble Calcutta High Court came to conclusion that if any activity has been held as not amounting to manufacture, the same will not be “production” also. However in the case "PSL CORROSION CONTROL SERVICES LTD. versus COMMR. OF C. EX. & CUS., DAMAN [2008 (12) S.T.R. 504 (Tri. - Ahmd.)]", Hon’ble Tribunal held that manufacture and production are not synonymous and held further that that every production may not necessarily amount to manufacture but every manufacture would be covered by the expression ‘production’. Drawing reference to the fact that “Legislative intent that the ‘production’ activity which may not be covered by Section 2(f) and may not be liable to pay excise duty in terms of that Act would get covered by the definition of “Business Auxiliary Service”, it can be implied that the exchequer wants to earn revenue from the taxpayer in any form whether it's service tax or excise duty. Though the intention itself is not questionable, the manner of its implementation due to the degree of complexity involved in the legislative formulations is definitely questionable. So far as the new negative list era is concerned, it is true that both production and manufacture whether they are interchangeably useable or not are exempted from the purview of service tax. However so far as job work is concerned, serial no. 30 of mega exemption notification no. 25/2012-ST dated 20.6.2012, says, “Carrying out an intermediate production process as job work in relation to –“; here the word “as” is significant because the specific phrase may be construed as one having relevance to the principal manufacturer to whom the “production process as job work” is intermediate which in turn leads to the final phase of completion of the production process. It’s beyond doubt that the departmental authorities are more than reluctant to extend benefits to the assessees; hence it can be well assumed that goods when cleared by job worker as per provisions of rule 4(6) of the Cenvat Credit Rules, 2004, the exemption under “mega exemption serial no. 30” will be applicable? Thanks and regards CMA Debashis Basu dbsshbs@gmail.com

Comments