Applicability of service tax on labour - bifurcation between labour and material used

[sunil mehta]

A proprietory firm receives jobwork for manufacture of a product falling under ecise tariff.Main material is supplied by ltd.co.Other small materials are purchased by service provider.Upon manufacture of finished product,two invoices are to be raised:1)one for job charges & 2)second bill for sale of 'other small materials purchased and incld.in manf. of finished product.The ltd.co. has offered price for jobwork(incld.cost of small materials used by service provider). Query:1)How prop.firm will bifurcate between 'other materials used & labour)? 2)Whether this jobwork will attract S.T.even though service provider uses labour & partly uses his own material for mfg.of final product? 3)If above work is fully divided among 2 subcontractors (prop.firm only purchases small materials for mfg.of product)whether subletting of jobwork will attract S.T ,if prop.firm pays full S.T. on jobwork price? s.mehta

[Madhukar N Hiregange]

The case you are discussing has central excise, VAT/CST and service tax implication. The addition of material on component supplied by the customer would result in a works contract and the local VAT or CST would be applicable to the extent of the materials incorporated since the same is being transferred. The labour part can be deducted and on the balance only VAT need be paid. The deduction for input VAT also would be admissible.Where the labour is not readiliyt availabel standard labour deduction is available under the local ST/VAT law maybe used. If the process amounts to manufacture there would be no service tax impact. If manufacture then the job worker should ensure that he is not corssing Rs.100 laksh which is the limit for excise duty payment including the value of materials supplied by the customer. Alternatively he should get the materials from the cusotmer under Rule 4(5)(a)_Annexure 2 challan. The raising of two bills if used should have matching POs. Sub contracting to a job worker who does not add any material is possible without any ST/ VAT implications.

[Surender Gupta]

In your case bifurcatiion at your end will not help to save service tax on the material prortion (since the ltd. co. has offered a composit charges). However, you can take the benefit of notification no. 12/2003 to deduct cost of material from the whole charges.

AI Summary

Service tax on mixed jobwork: distinguish material and labour; materials attract VAT while manufacture may attract excise instead. Service tax applies to the labour component of jobwork after distinguishing it from materials; materials incorporated are treated as transferred goods and subject to VAT while processes amounting to manufacture fall under excise rather than service tax. Separate invoicing for job charges and materials should match purchase orders. Composite pricing may restrict bifurcation but material-cost deduction under the applicable notification can isolate the taxable service portion. Subcontracting where no material is added typically avoids service tax or VAT on materials. Jobworkers should monitor excise-registration thresholds and may use the prescribed challan for customer-supplied materials.