Job worker retains scrap - should principal raise tax invoice for transferring ownership.

[Chirag Mehta]

Hello,

Lets say Job worker(Registered) has sold scrap or lets say retained. Principal asks to consider it payment towards job charges and pays remainder amount. 

The issue is, for above situation, whether Principal is required to issue Tax Invoice for Scrap to Job worker? 

Many experts believe Transaction Value = Monetary Consideration + Value of Scrap/by-products retained by Job worker. Then Principal should issue invoice for scrap/by products to Job worker. The Circular No. 38/12/2018 doesnt explicitly state that but we are expected to follow GST acts regarding invoicing and valuation.

So, what is the standard practice whether invoice should be given or not?

Thanks.

[KASTURI SETHI]

Dear Querist,

Read para no.9.4 (iii) and (ii) carefully and also note that Circular No.38/12/2018 has been amended vide C.B.I. & C. Circular No. 88/07/2019-GST, dated 1-2-2019 (Focus on Para No.4)

Here the word, "principal" means owner. The principal is the owner of the goods (inputs or capital goods) sent for job work to the job worker. The whole responsibility lies with the principal regarding payment of tax and return of goods as per Section 143 (2) of CGST Act. Also read Section 143 (5) of CGST Act.

The principal is also the owner of the waste/scrap/bye-product generated during the job work. The job worker is concerned with the job charges only (to be recovered from the principal). The waste/scrap/ bye-product generated during the job-work is also final product. The principal is the owner of such final product. The principal should raise the invoice to his buyer. That buyer may be his job-worker or any other person.

If the job worker is registered, he can also sell waste/scrap/bye-product.

Pl. read the following decision of AAR (Kerala) :-

IN RE : INDUSTRIAL ENGINEERING CORPORATION - 2019 (11) TMI 110 - AUTHORITY FOR ADVANCE RULING, KERALA

Advance Ruling No. KER/59/2019, dated 16-9-2019

 

[Chirag Mehta]

Hello,

Thanks for responding.

In AAR (Kerala) :- 2019 (11) TMI 110 - AUTHORITY FOR ADVANCE RULING, KERALA it was upheld that registered job worker can sell scrap and would pay GST on any receipts. It is understood.

It doesnt talk about whether Principal is required to issue a Tax Invoice to job worker who sells the above scrap.

para no. 9.4 (iii) and (ii) talks about value, place of supply and Invoicing in context of manufactured goods, inputs, capital goods.

Sub - section (5) of Section 143 of the CGST Act provides that the waste and scrap generated during the job work may be supplied by the registered job worker directly from his place of business. The principles enunciated in para (ii) above would apply mutatis mutandis in this case.

By mutatis mutandis, it should probably mean time, value and place of supply of scrap as described in para (ii) (in context when job worker is unregistered or Principal decides to sell scrap).

If it meant Principal should first sell scrap to registered job worker then why is there need of 143(5) that mentions that registered job worker can directly sell scrap.

My take is Principal is not required to issue Invoice for scrap to registered job worker because JW works on and behalf of principal.

If job worker sells scrap on Principals account and no depression in job charges, Job worker can issue a financial credit note.

If Transaction value = Monetary + Value of scrap(barter) requires Invoicing of scrap from Principal to job worker, then doesnt it contradict 143(5)?

Is my understanding correct or is there any flaw with regards to this.

Thanks

[Sadanand Bulbule]

Dear Sirji

I welcome your clear reply on the retention of scrap by the job worker and tax liability on the principal, being the owner of such scrap or any such bye-product obtained during the process. Further the job worker can claim ITC on the strength of tax invoice issued by the principal to him like any other regular business transaction.

[KASTURI SETHI]

Sh.Sadanand Bulbule Ji,

YES, SIR. 100% correct. There must be some agreement between the principal and job-worker. We are not aware of the terms and conditions. When the principal is the owner of such scrap/waste, it is his option how to go ahead. The principal is responsible for all taxes including the return of job-worked goods as per Section 143.

It appears to me that the query is in advance. Raring to go with tax planning. To be pro-active is a big plus point.

[Chirag Mehta]

Sir,

With all due respect, then what purpose does Sub - section (5) of Section 143 of the CGST Act mean when it says job worker can sell scrap directly if he is registered?

I am not professional therefore I may sound as if Im looking for ready solution.

Thanks. 

[KASTURI SETHI]

"Para no.9.4 (iii) and (ii) talks about value, place of supply and Invoicing in context of manufactured goods, inputs, capital goods"

Ans. Waste and scrap generated during the process of manufacture is a manufactured goods. It has HSN.

The principal is the owner of such manufactured goods (waste and scrap). Sale proceeds of such waste and scrap belong to the principal. Job worker can issue credit note. Job-worker is not the owner of such scrap/waste.

Is my understanding correct or is there any flaw with regards to this ?

Ans. NOT correct. NOT XRAYED the AAR decision. NOT grasped the lengthy amended 88/2019. All should be read with Section 143. Read from A to Z. You are capable to follow. You are making hurry. Such things consume time.

So study deeply and then post your doubts here PLEASE. Coming off hand will not serve any purpose.

[Sadanand Bulbule]

Yes Sirji. The querist is searching for best raincoat much before the onset of monsoon.

[Chirag Mehta]

Hello Sir,

I teach accounting and I wanted to ensure I teach without misleading any student.

My level of interpretation cant match that of yours.

You are seasoned professional and more experienced.  

You may have solid peer network.

I do read books and in this book 

GST for Accounts and Finance teams, 2nd Edition, by BD Chatterjee. 

In job work section, this is the entry for

Issue of credit note to Principal for sale of waste/scrap, if sale of waste/scrap is on account of principal

Waste & scrap A/c Dr. x 

To Principal A/c x 

(Being credit note issued to the Principal for sale of waste/scrap, if sale of waste/scrap is on account of principal)

Same entry is in ICAIs published 

Handbook on Accounting Treatment under Goods and Service Tax (GST)

All I asked is when sec 143(5) says regd. job worker can sell scrap directly then why are experts of view that Principal is required to raise tax invoice. 

What does DIRECTLY mean in sec 143(5)?

Is it mandatory to sell scrap by Principal only? or job worker can issue credit note if he sells on Principals account?

Thanks and Regards,

Chirag.

[Sadanand Bulbule]

Dear Chirag ji

From your last post, it is clear that you are aware of the answer to your query. In that situation, follow the intent and responsibility enshrined in Section 143[5] of the CGST Act as far as tax laibility is concerned. Hope the authority shall accept it.

Secondly, this discussion forum is only for sharing opinions the way it is understood by the providers, and not a judgement forum. Finally it is the choice of the querist to accept it or otherwise. Perceptions and opinions do differ. No one is competing with others in terms of stock of knowledge of law. In fact, every one is investing lot of precious time and energy selflessly to provide the best possible solution in his/her own style without distorting the object of discussion. Finally all are seekers here and in turn all are benefited from such outcomes.

[KASTURI SETHI]

Dear Querist,

The guiding voice of Sh.Sadanand Bulbule, Sir aligns with my thoughts.

However, I further clarify as under :-

No manufacturer intentionally manufactures waste and scrap. It is generated during the process of manufacture. Hence such product is also called bye-product. (additional information)

The job worker is the manufacturer of such bye-product but the job-worker is not the owner of such bye-product. (as explained in above replies). This bye-product belongs to the principal who sends his inputs/intermediate goods etc. to the job-work.

Q. What does DIRECTLY mean in sec 143(5) ?

Ans. Here the word, "directly" means the job worker can supply the waste and scrap from his own business premises (registered) direct to any buyer instead of sending it back to the principal, after payment of tax. Such transaction will be on the basis of mutual agreement between both.

Q. Is it mandatory to sell scrap by Principal only ?

Ans .No. It is not mandatory for the principal to sell/supply such waste/scrap from his own business premises. The job-worker (registered) can sell/supply such bye-product from his own business premises.. Since the goods belong to the principal, so the job-worker will pay sale-value to the principal by any mode of payment.

Q. Can job worker issue credit note if he sells on Principals account ?

Ans. YES.

[Shilpi Jain]

Terms of the agreement would be very important in this. If the agreement itself explicitly states that scrap + Rs. xx will be the consideration then job work charges will be a summation of both these values.

If no such stipulation, and job worker is required to send back x quantity for y quantity given by the principal, then on case to case basis it has to be seen. Say for example, 200 kg of iron is sent, then 200 kg has to come back, else it will be treated as supply to JW,

In some cases this one to one correlation may not be possible. 

So case to case this has to be seen.

[Chirag Mehta]

Hello Madam, thanks for responding.

Also thanks to Sadanand Sir and Kasturi Sir for your valuable insights.

The scenario Im focused is where job worker sells scrap on account of principal (if agreed).

As far as I know about industry practice, it is mostly job worker who sells the scrap.

Seldom a principal would be interested to take it back or sell on his invoice to a party other than job worker. 

It is  convenient for principal because he is concerned with outcome of the job work and not worrying about where to sell scrap.

To summarize,

There is no doubt that if job charges are reduced on account of retention of scrap or its proceeds, then taxable value for job charges will be Monetary consideration + value of scrap for purpose of GST calculation and its payment thereon.

Possible Accounting treatment could be either,

Principal sells scrap to Job worker (easy for auditing) or

Job worker issue a financial credit note if he is selling on Principals account, reduce total receivables. (Much leaner accounting practice)

GST credit note cant be issued since it will also reduce GST liability linked to job work service invoice.

I hope above explanation is agreeable.

With regards to quantity to be sent back. I have a follow up query.

If scrap is sold by job worker(if agreed) then quantity returned will not include qty of scrap sold or left with job worker. 

Eg. 200 sent for job work, 20kg scrap sold, then quantity returned to principal would be 180kg. 

Thanks. 

[KASTURI SETHI]

Regarding the example given by Madam Shilpi Jain, 200 Kg. includes scrap generated during the process of manufacture. I fully agree with the reply of Madam Shilpi Jain.

AI Summary

Job worker can sell scrap directly from premises with principal's agreement under Section 143(5) A registered job worker retained scrap and the principal considered it as payment toward job charges. The query addressed whether the principal must issue a tax invoice for transferring scrap ownership to the job worker. Experts debated that transaction value includes monetary consideration plus scrap value, requiring the principal to invoice the job worker for scrap. However, Section 143(5) of CGST Act allows registered job workers to sell scrap directly. The discussion concluded that while the principal owns the scrap, job workers can sell it from their premises with mutual agreement and issue financial credit notes rather than GST credit notes when selling on the principal's account.