2018 (11) TMI 59 - AAR - GST

Processing natural gas into industrial gases qualifies as 'job work' under GST laws

The Authority for Advance Rulings determined that the applicant's activity of processing natural gas and other inputs into industrial gases qualifies as ... Job work - treatment or process - inputs - manufacturing services on physical inputs owned by others (HSN 9988) - transaction value - in the course or furtherance of businessJob work - treatment or process - inputs - Activity of processing natural gas and other inputs supplied by BPCL at applicant's plant constitutes job work under GST. - HELD THAT: - Job work under the GST law is any treatment or process undertaken by a person on goods belonging to another registered taxable person. The inputs supplied by the principal (natural gas, de mineralized water, raw water, etc.) are goods and fall within the statutory definition of 'inputs' used in the course or furtherance of business. The applicant undertakes conversion of those inputs into industrial gases which are returned to the principal; such conversion qualifies as a 'treatment or process'. The statute imposes no requirement that the inputs be taxable goods for job work to apply. The use by the job worker of minor ancillary materials does not alter the character of the transaction as job work when ownership of inputs and outputs remains with the principal.Processing of natural gas and other inputs supplied free of cost by BPCL and conversion into industrial gases is job work under GST.Manufacturing services on physical inputs owned by others (HSN 9988) - job work - The job work activity carried out by the applicant is a service falling under HSN 9988 and taxable at 18%. - HELD THAT: - Under GST the scope of job work includes manufacture; HSN 9988 expressly covers manufacturing services performed on physical inputs owned by others. The applicant does not own the inputs or the industrial gases produced; ownership remains with the principal. Given these facts, the applicant's activity is a provision of service within serial No. (ii) of HSN 9988. The Authority has applied this classification to conclude the applicable rate.The applicant's job work is a service covered by HSN 9988 (manufacturing services on physical inputs owned by others) and is taxable at 18% GST.Transaction value - job work - GST on job work services is payable on the transaction value (price actually paid or payable) of the job work charges. - HELD THAT: - Valuation of the job work service is governed by the transaction value principle. The taxable value is the consideration actually paid or payable under the commercial arrangement between the principal and the job worker. No other costs are to be included in the value unless they are specifically agreed to be part of the job work charges between the parties.GST is payable on the transaction value, i.e., the job work charges actually paid or payable to the applicant.Final Conclusion: The Authority rules that the applicant's conversion of inputs supplied free of cost by BPCL into industrial gases is job work; such activity is a taxable service under HSN 9988 at 18%, and GST is payable on the transaction value of the job work charges. Issues:1. Whether the activity undertaken by the applicant amounts to 'job work' as defined under Section 2(68) of GST Laws and consequently classified as supply of servicesRs.2. What would be the tax rate for supply of job work services if the proposed activity is considered as job workRs.3. What is the value on which the applicant would be liable to pay GST if the proposed activity is considered as job workRs.Analysis:Issue 1:The applicant, a manufacturer of industrial gases, desires to change the business model to a job work model with the customer providing inputs on a free of cost basis. The applicant sought an advance ruling on whether their activity qualifies as 'job work' under GST laws. The Authority for Advance Rulings analyzed the definition of job work under Section 2(68) of the GST Law, which involves any treatment or process undertaken by a person on goods belonging to another registered taxable person. The authority found that the applicant, as a job worker, satisfies the necessary requirements as they undertake treatment or process on goods belonging to the principal customer. The activity of converting natural gas and other inputs into industrial gases qualifies as 'job work' as per the GST Act.Issue 2:Regarding the tax rate for job work services, the authority referred to HSN 9988 under GST, which includes manufacturing services on physical inputs owned by others. The definition of 'manufacture' under Section 2(72) of GST Law was also considered, emphasizing the emergence of a new product with distinct characteristics. The authority highlighted that job work under GST includes manufacturing as well, and the applicant's activity of converting inputs into industrial gases falls under this category. Therefore, the applicable tax rate for the job work services provided by the applicant was determined to be 18% GST.Issue 3:In determining the value on which GST would be payable for the job work services, the authority clarified that the transaction value, i.e., the price paid or payable as per the commercial arrangement between the applicant and the principal, would be the basis for GST calculation. The ruling emphasized that no additional costs need to be considered for valuation unless specifically included in the job work charges agreed upon by the parties. Therefore, the GST payable by the applicant would be based on the transaction value for the job work services rendered.In conclusion, the Authority for Advance Rulings issued rulings affirming that the applicant's activity of processing natural gas and other inputs into industrial gases through job work falls under the scope of 'job work' under GST. The service provided by the applicant is classified as a provision of service falling under HSN 9988 taxable at 18% GST, with GST payable on the transaction value for the job work services rendered.