The issue involved in this case that if the material is supplied by the principal owner then whether such activity is classified as a job work or composite supply?

CASE STUDY
M/S Shailendra Textiles Pvt Ltd ( Order No. 403/2018-GST dated 12.10.2018)
                                                                                       Prepared By: Himanshu Bhimani

Introduction:The compendious of the case is that M/s Shailendra Textiles Pvt. Ltd (Hereinafter referred to as the appellant)isregistered with GSTIN 08AAACS9964L1ZM. They are engaged in the textile dyeing job activities and have filed a refund claim for Rs.80256 for the month of September, 2017 on account of accumulation of input tax credit due to inverted tax structure.
A show cause notice no. V (Rfd) 18/JDR/GST/527/2018 dated 09.10.2018 was issued to the appellant allegingthat refund on account of accumulation of input tax credit due to inverted tax structure is not admissible to the appellant. The department officials alleged that for an activity to be considered as job-work, the material portion should be involved to the minimum extent possible by the job-worker which is not the case.
Issue Involved: The issue involved in this case that if the material is supplied by the principal owner then whether such activity is classified as a job work or composite supply?

Brief Facts: The compendious of the case is that M/s Shailendra Textiles Pvt. Ltd (Hereinafter referred to as the appellant)isregistered with GSTIN 08AAACS9964L1ZM. They are engaged in the textile dyeing job activities and have filed a refund claim for Rs.80256 for the month of September, 2017 on account of accumulation of input tax credit due to inverted tax structure.
A show cause notice no. V (Rfd) 18/JDR/GST/527/2018 dated 09.10.2018 was issued to the appellant allegingthat refund on account of accumulation of input tax credit due to inverted tax structure is not admissible to the appellant. The department officials alleged that for an activity to be considered as job-work, the material portion should be involved to the minimum extent possible by the job-worker which is not the case. The assessee has availed the input tax credit of dyes and chemicals which attracts 18% GST while GST on Job Work is 5%. Textile Units can file refund of inverted duty structure in case they are engaged in job work.

Assessee’s Contention:
It is alleged that if there is substantial use of material by the job worker, the activity is to be considered as supply of goods rather than supply of service of job-work. In the present case, only fabric is being supplied by the principal manufacturer whereas all the dyes and chemicals were used by us. In this regard, the appellant submit that the allegation is totally baseless and without any legal backing. Furthermore, if appellant observe the provision contained in entry no. 3 of the Schedule II of the CGST Act, 2017, appellant find that “any treatment or process which is applied to another person’s goods is to be considered as supply of services”. Appellant submit that when the CGST Act, 2017 is clear that the process undertaken on another person’s goods is supply of service, the question of composite supply does not come into picture at all. appellant submit that the concept of composite supply will be applied only when there is conscious supply of two or more taxable supply of goods or services or both. However, in the present case, appellant is merely undertaking processing on the fabrics sent by the principal manufacturer and so the appellant is clearly supplied service as per entry no. 3 of the Schedule II of the CGST Act, 2017. appellant submit that the heading of Schedule II states that “Activities to be treated as supply of goods or supply of services”. When the job work activity is clearly stated as supply of service, there remains no scope of doubt as regards the supply to be considered as supply of goods on the basis of component of materials used therein. appellant submit that if the concept of composite supply is made applicable even on the supplies specifically covered by Schedule II, the same will lead to absurd results. Say for example, the activity of construction of complex is considered as supply of service inspite of the fact that there is significant involvement of materials during the course of performance of such activity. If the contention of the impugned show cause notice is accepted for the sake of argument, then in case of construction of complex, GST will be discharged as supply of goods on case to case basis wherein the material portion is significant which is totally wrong. Appellant submit that when the provision has clearly considered the activity of job-work as supply of service, applying the principles of composite supply is totally baseless. Therefore, the impugned show cause notice proposing to reject our refund claim on the grounds that the material composition in the activity is substantial is totally erroneous and the same deserves to be set aside.
The impugned show cause notice has placed reliance on the Circular No. 47/21/2018 dated 08.06.2018 for treatment of servicing of cars under GST. In this regard, the appellant reiterate that the clarification merely states that in case of composite supplies, the nature of supply is to be ascertained from the principal supply of the contract. It is clarified that in case of servicing of cars, the rate of GST applicable will be determined on case to case basis. However, appellant submit that the concept of composite supply is not at all applicable in case of job work as the same is specifically declared as supply of service under entry no. 3 of the Schedule II of the CGST Act, 2017. The Appellant submit that even otherwise, the proportion of material element cannot determine the rate of GST applicable. Say for example, in case of ‘Knee Replacement Surgery’ we cannot say that since the material component being artificial knee is substantial, the entire activity will be considered as supply of goods and taxable to GST accordingly. Appellant submit that in the above cited example, even when the cost of artificial knee is substantial, the activity will continue to be covered under ‘health care services’ and not supply of goods. Similarly, in case of supply of mandap keeper service, the cost of food may bear significant proportion to the overall consideration but that will not lead to treating the said transaction as supply of food and rather the transaction will continue to be consider as ‘supply of mandap keeper service’. Therefore, the composition of material element in a transaction can in no way determine the nature of transaction or its GST rate. Hence, the allegation of the impugned show cause notice is not at all sustainable and deserves to be set aside.
The impugned show cause notice has also placed reliance on the decision given by the Apex Court in the case of M/s Prestige Engineering (India) Ltd. Vs Collector of C. Excise, Meerut [1994 (73) E.L.T. 497 (S.C.)]. In this regard, the Appellant submit that the impugned show cause notice has wrongly placed reliance on the above cited decision which was rendered in the context of job work under Central Excise Notification No. 119/75 and this decision cannot be applied universally, particularly in the GST regime which is altogether different from the Central Excise Laws. Moreover, the decision of Supreme Court in the case of Prestige Engineering has been distinguished by various judicial pronouncements in the Central Excise regime itself.
It was held in the case of COMMISSIONER OF CUSTOMS & C. EX., BHOPAL VERSUS ABHINAV CHEMICALS [2012 (284) E.L.T. 589 (Tri. - Del.)] that the notification no. 214/86-CE (pertaining to excise exemption to goods sent on job-work basis) does not require that all the raw materials for the manufacture of final product must be supplied by the principal manufacturer. Consequently, even if the job-worker uses inputs during the course of processing, it will not lead to denying the said process as job-work. Furthermore, it was also held that the conclusion given in the case of Prestige Engineering was based on the definition of job work as given under notification no. 119/75-CE which is different from the definition of job work as given under notification no. 214/86. Consequently, the ratio of the decision given by the Apex Court cannot be applied for the job work done under notification no. 214/86-CE. It was also held that the exercise is revenue neutral as even if the job-worker paid central excise duty, the principal would be eligible to avail the credit of the same.
Similar view that it is not necessary that raw materials should also be supplied along with moulds and dies sent for job-work was taken in the case of COMMISSIONER OF C. EX., PONDICHERRY VERSUS WHIRLPOOL OF INDIA LTD. [2015 (316) E.L.T. 209 (MAD.) by Madras High Court.Apart from the above cited decisions, Bombay High Court has also held in the case of COMMR. OF CUS. (IMPORTS), MUMBAI VERSUS SUJAG FINE CHEMICALS (INDIA) LTD. [2013 (295) E.L.T. 32 (BOM.)] that the phrases used in a particular notification are to be strictly read and the meaning of job work as given in notification no. 119/75-CE cannot be imported for construing job work under notification no. 32/97-Cus. Hence, this decision also indicated that the conclusion given by the Apex Court in the case of Prestige Engineering was specific to job work under notification no. 119/75 and cannot be applied universally.
It is submitted that from the above referred decisions it is clear that there were contradictory views regarding this issue in the erstwhile taxation regime. It was not necessary condition that minimal material should be added by job-worker in order to avail benefit of exemption admissible to job worker. Therefore, the decision given by Supreme Court was specific to facts and circumstances prevalent during the material time and cannot be applied in the GST regime. Hence, the impugned show cause notice proposing to reject our refund claim by placing reliance on the Apex Court decision is not at all tenable and should be set aside.
The impugned show cause notice has also placed reliance on the decision given by the Maharashtra Authority for Advance Ruling for Goods & Services Tax in the case of JSW Energy Limited vide Order No. MAH/AAAR/SS-RJ/01/2018-19 dated 02.07.2018. In this regard, the appellant submit that erroneous reliance has been placed on this decision as it pertains to altogether different issue. The issue involved in the relied upon case was 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? However, in the present case, appellant have filed refund claim of inverted duty structure as the GST rate on job work of fabrics is lower than the inputs used therein. appellant submit that the refund claim is being proposed to be denied on the grounds that the activity done by us is not job-work and is rather supply of goods. appellant submit that the allegation is not at all proper as we undertake dyeing of fabrics and we apply chemicals and dyes during the course of process of dyeing of fabrics. appellant submit that it is very weird to conclude that appellant is supplied dyes and chemicals and have not undertaken job work. appellant submit that the findings that the activity undertaken by us does not amount to job work is not backed by any statutory provision in the GST law whereas appellant have categorically mentioned that the activity undertaken by us is declared as supply of service under entry no. 3 of the schedule II of the CGST Act, 2017. As such, the grounds of rejection of refund claim are not proper and the impugned show cause notice deserves to be quashed.
It is alleged that where a supply involves supply of both goods and services and the value of such goods and services supplied are shown separately, the goods and services would be liable to tax at the rates as applicable to such goods and services separately. If goods and services are not shown separately on invoice, then that case would be decided on case to case basis. Hence, it is contended that if the job worker does not shows value of goods and job work separately, then it would be a case to case determination wherein use of material is substantial. The appellant reiterate that the decision regarding nature of supply is to be made according to the provisions incorporated in the GST Law. As stated earlier, entry no. 3 of the Schedule II of the CGST Act, 2017 considers the ‘job-work activity’ as supply of service. Therefore, in absence of any other legal backing, the contention of the impugned show cause notice that job work is to be considered as composite supply and its nature is to be ascertained from the principal supply is totally baseless. The appellant submit that even in case of repairing of car, although the substantial element is that of material involved, even then the said activity is considered as supply of service. As such, the proportion of material involved cannot lead to conclusion that the activity is supply of goods. Therefore, the impugned show cause notice is not sustainable and deserves to be set aside.
The impugned show cause has also placed reliance on the circular no. 34/8/2018 dated 01.03.2018 on the issue whether activity relating to bus body building is a supply of goods or services. It was held that the classification of this composite supply as goods or service would depend on principal supply which may be determined on the basis of facts and circumstances of each case. The appellant submit that the impugned show cause notice has placed erroneous reliance on the clarification as the same pertains to composite supply whereas ‘job-work’ is clearly specified as ‘supply of service’ under entry no. 3 of the Schedule II. The appellant submit that if the activities specifically mentioned as supply of service are considered as supply of goods, it will lead to redundancy of Schedule II. The appellant submit that any interpretation which leads to absurdity or redundancy should be avoided. It is submitted that hon’ble Supreme Court in the case of BRITISH AIRWAYS PLC VS UNION OF INDIA [2002 (139) ELT 6 (S.C.)] has held that while interpreting a legal provision, the court should try to sustain its validity and purpose behind which the same is enacted. Any interpretation which leads to absurd result should be avoided and in case of conflict, harmonious interpretation should be taken. The verdicts of hon’ble Supreme Court are given as follows:-
While interpreting a statute the court should try to sustain its validity and give such meaning to the provisions which advance the object sought to be achieved by the enactment. The court cannot approach the enactment with a view to pick holes or to search for defects of drafting which make its working impossible. It is a cardinal principle of construction of a statute that effort should be made in construing the different provisions so that each provision will have its play and in the event of any conflict a harmonious construction should be given. The well-known principle of harmonious construction is that effect shall be given to all the provisions and for that any provision of the statute should be construed with reference to the other provisions so as to make it workable. A particular provision cannot be picked up and interpreted to defeat another provision made in that behalf under the statute. It is the duty of the court to make such construction of a statute which shall suppress the mischief and advance the remedy. While interpreting a statute the courts are required to keep in mind the consequences which are likely to flow upon the intended interpretation.”
An analysis of this decision makes it clear that the various provisions of an enactment should be so interpreted that every provision is effective and if there is any conflict, the harmonious interpretation should be given effect. Similar decision has been given by larger bench of Mumbai Tribunal in the case of CCE, MUMBAI -V VS M/S GTC INDUSTRIES LTD [2008 (12) S.T.R. 468 (Tri-LB)]. The verdicts of hon’ble Tribunal from paragraph 9 are produced as follows:-

“It is well settled that every clause of the Statute should be construed with reference to the context in which it is issued. A bare mechanical interpretation of words and application of legislative intent is devoid of concept and purpose will reduce most of the remedial and beneficial legislations to futility. To be literal in meaning is to see the skin and miss the soul.
The legislature never wastes its words or says anything in vain and a construction which attributes redundancy to legislation will not be accepted, as has been observed by the Supreme Court in the case of Union of India vs. Hansoli Devi 2002 7 SCC 273”
Decision: Refund Sanctioned vide Order No. 403/2018-GST.

Conclusion:-The submissions of the appellant was accepted and refund sanctioned. On the basis of above pretentions ,it can be concluded that, if there is substantial use of material by the job worker, the activity is to be only considered as supply of service of job-work. Refund can be claimed by the textile units on account of accumulation of input tax credit in case of inverted duty structure if the mentioned conditions are satisfied.

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PJ/Case Study/2018-19/143
19 January 2019

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PJ/Case Study/2018-19/143 19 January 2019

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PJ/Case Study/2018-19/143
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