In house job-work by Export Company and service tax

[Ashok Chopra]

Respected Forum,

I am manufacturer-exporter of ready made garments. i am availing benefit of Duty Drawback. Stitching of garment is done in my company on contract basis. Contractor raise bill on me.

During service tax audit, officer is of opine that this service will fall under reverse charge mechanism and i am liable to pay service tax on contractor's bill.

Please guide me accordingly. Also please provide me copy of notification and case law to satisfy my management.

Thanks and regard

[Himansu Sekhar]

If the conditions are same as that of the third question, the view of mine is same.

[Nash Industries I Pvt Ltd]

As there is a supply of manpower, Service Tax is applicable under RCM.

Regards

S.Ramaswamy

[KASTURI SETHI]

Dear Querist,

If CE duty is paid on your finished goods or the finished goods are exported, then there is no question of applicability of Service Tax. Exported goods are not exempted goods but to be treated as duty paid. Go through the relevant extract of Board's Letter D.O.F. No. 334/8/2016-TRU, dated 29-2-2016] (Central Excise) in this context.

3.1.1 Excise duty of 2% (without CENVAT credit) or 12.5% (with CENVAT credit) is being levied on readymade garments and made up articles of textiles falling under Chapters 61, 62 and 63 (heading Nos. 6301 to 6308) of the Central Excise Tariff except those falling under 6309 and 6310 of retail sale price (RSP) of ₹ 1000 and above when they bear or are sold under a brand name. This optional levy would apply to such readymade garments and made up articles of textiles regardless of the composition of the garment / article. However, in respect of readymade garments and made up articles of textiles other than those mentioned above, the optional levy of „Nil (without CENVAT credit) or 6% (with CENVAT credit)‟ in case of garments / articles of cotton, not containing any other textile material and „Nil (without CENVAT credit) or 12.5% (with CENVAT credit)‟ in case of garments / articles of other composition, as the case may be, shall continue. The tariff value for readymade garments and made up articles of textile is also being increased from 30% to 60% which shall apply to all goods mentioned in the notification No.20/2001-CentralExcise (N.T.) dated 30.04.2001. It may be noted that the new levy is similar to the levy of mandatory excise duty of 10% on readymade garments and made up articles of textiles [goods falling under Chapters 61, 62 and 63 (heading Nos. 63.01 to 63.08)] when they bear or are sold under a brand name, which was introduced in the Budget 2011-12, except that:  

a. The present levy is an optional levy, that is domestic manufacturers will have the option to pay excise duty of „ 2% (without CENVAT credit) or 12.5% (with CENVAT credit)‟,

b. The levy is restricted to such articles which have RSP of ₹ 1000 and above, and

c. The tariff value is being revised from 30% of RSP to 60% of the RSP.

3.1.2 In this regard, I would like to reiterate the instructions issued vide Budget letter F.No.334/3/2011-TRU dated 28.02.2011, Instruction D.O. F.No.334/3/2011-TRU, dated 04.03.2011 and Instruction D.O. F.No. B-1/3/2011-TRU, dated 25.03.2011. The said instructions shall apply mutatis mutandis to the new levy. Salient features of these instructions [suitably modified for the proposed optional levy, as underlined] are as under:

(i) The levy shall not apply to retail tailoring establishments that stitch garments in a customized manner to the size and style specifications of individual customers, whether out of fabric purchased by the customer from the same establishment or fabric supplied by the customer.

(ii) The brand name owner, who gets the goods manufactured on his own account on job work, shall pay the duty leviable on such goods as if the goods were manufactured by him. The brand name owner (and not the job-worker) shall be required to register and comply with all the provisions of Central Excise law. Rule 4 (1A) of the Central Excise Rules, 2001 and Para 1, clause (vi) of notification No.36/2001-C.E. (N.T.), dated 26.06.2001 refers.

(iii) However, the brand name owner will be given the option to authorise his job-worker to pay the duty leviable on the goods. If such an authorisation is given, then the job-worker would have to obtain registration. Proviso to rule 4 (1A) of the Central Excise Rules, 2001 and proviso to Para 1, clause (vi) of notification No.36/2001-C.E. (N.T.), dated 26.06.2001 refers.

(iv) A unit which manufactures goods bearing the brand name of another person out of inputs or raw materials which have been purchased independently and not supplied by the brand owner, does not satisfy the definition of “job-worker” and would, therefore, have to obtain registration and discharge the duty liability.

(v) In cases where the brand name owner gets goods bearing its brand manufactured from other manufacturers (normally small units) without providing the raw materials or inputs, and if the RSP is not affixed or marked on such goods when they are cleared in the course of sale from the factory of a manufacturer to the brand owner, then no excise duty would be payable by such a manufacturers since the RSP of such goods is not disclosed to them by the brand owner. However, since the process of labeling or re-labelling constitutes a process of “manufacture”, duty on the tariff value (based on the RSP) would be payable as and when the brand owner labels the goods with the RSP of ₹ 1000 or above and clears them for further sale. 

[Rajagopalan Ranganathan]

Sir,

It appears that the Audit Officer feels the service provided by your contractor is supply of man power service. It is not supply of man power service since according to section 2 (f) of Central Excise Act, 1944 "manufacture" includes any process incidental or ancillary to the completion of a manufactured product. Here stitching the garments is incidental or ancillary to manufacture of ready-made garments. Therefore the activity carried out by your contractor is manufacture and not providing service. Hence the view of the Audit Officer is without any legal basis.

[Nash Industries I Pvt Ltd]

With due respects to the experts on their opinion, I differ.

The contractor is a service provider supplying the manpower to complete the process of manufacturing. The job is a manufacture and not service for the purpose of service tax as BAS.

Here, the manpower is supplied by the contractor to do the job and hence service tax is applicable on RCM as manpower supply and not as BAS.

With Regards

S.Ramaswamy

[YAGAY andSUN]

Even then it is revenue neutral for the manufacturer exporter and Hence, not payable under reverse charge.

AI Summary

Debate on Service Tax Applicability Under Reverse Charge for Stitching Services in Garment Manufacturing An export company engaged in manufacturing ready-made garments raised a query regarding the applicability of service tax under the reverse charge mechanism (RCM) for stitching services provided by a contractor. During a service tax audit, an officer opined that the company is liable for service tax on the contractor's bill. Responses varied; some experts argued that the service is part of the manufacturing process and not manpower supply, thus not subject to RCM. Others maintained that service tax applies under RCM for manpower supply. One response noted it might be revenue neutral for the exporter.