Unjust Enrichment of the Department

There is a very thin line of difference between a manufacturer and a job worker. A manufacturer is someone who manufactures goods of his own, whereas the job worker is one who takes up the contract and provides his services to the principal manufacturer. Mostly manufacturers outsource the technical works to job workers for various reasons. Service tax paid by the job worker is a kind of input service for the principal manufacturer for which he can avail Cenvat credit.

Notification No.8/2005-ST dated 01.03.2005 stipulates that job workers are exempted from service tax when their process does not amount to “manufacture” in terms of Section 2 (f) of Central Excise and this exempts the activity of job work only in case where appropriate duty is being paid by the Manufacturer. In case, these conditions are not met, the job worker must charge service tax on the said activity. The Central Excise department with is ever growing pro revenue approach has initiated demand on many manufacturers where their Job workers have paid service tax and consequently the manufacturers has taken Cenvat credit.

The fundamental issue on the basis of which Cenvat credit of service tax paid by the job worker is denied to principal manufacturer is that the job worker was eligible for exemption and the job worker received raw material or semi-finished goods from them for producing or processing goods from such goods i.e. they are doing the activity under Rule 4(5)(a) of Cenvat Credit Rules, 2004. The department believes that inspite of the exemption, the job worker pays service tax erroneously and the principal manufacturer takes the Cenvat credit of the same.

The said exemption shall apply only in cases where such goods are produced using raw materials or semi-finished goods supplied by the client and goods so produced are returned back to the said client for use in or in relation to manufacture on which appropriate duty of excise is payable. The notification also stress upon that appropriate duty does not include NIL rate of duty. In other words, even if the said product attracts no duty, the Job worker needs to pay service tax on the said activity. Denying Cenvat credit on such service tax paid by job workers has become a trend in recent Audits. Its not only beyond their jurisdiction to challenge taxability of a third party, it also adds to the cost of the manufacturers and leads to unjust enrichment of the Department.

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