Analysis
(i) Relevant Definitions:
Job work: Any treatment or process undertaken by a person on goods belonging to another registered person (section 2(68).
Job worker: A person who undertakes any treatment or process on goods belonging to another registered person.
Principal: A person on whose behalf an agent carries on the business of supply or receipt of goods or services or both.
(ii) Entitlement of credit on inputs: The principal can take credit of input tax on inputs sent to job-worker subject to fulfilment of the following conditions:
Rule 45 of Central Goods and Service Tax Rules, 2017 provides the following:
o To issue a delivery challan for transfer of inputs to the job-worker including where they are sent directly (to maintain paper trail of transaction)
o The details of delivery challans for goods dispatched to job worker or received from job worker or sent from one job worker to another during the quarter are to be included in Form GST ITC-04 to be furnished on or before 25th day of the month succeeding that quarter. Date of filing ITC-04 has however been extended from time to time.
o Delivery challan is to contain all details as required in respect of an invoice prescribed in Rule 55 of Central Goods and Service Tax Rules, 2017. All delivery challans issued in respect of inputs sent to a job-worker and those received back are to be reported in GSTR-1
o The inputs, after completion of job-work, are to be received back by the principal within 1 year of their being sent out.
o In case of non-receipt of the inputs within the time prescribed, the principal shall issue an invoice for the same and declare such supplies in his return for that particular month in which the time period of one year has expired.
o In case of direct supply, the period of 1 year shall be reckoned from the date the job worker receives such inputs.
o The credit of inputs can be taken even if inputs are sent directly to job-worker’s premises without bringing it to principal’s place of business.
o If the inputs are not received back within 1 year, it shall be deemed that such inputs had been supplied by principal to the job worker on the day when the said inputs were sent out.
(iii) Entitlement to credit on capital goods: The principal can take credit of input tax on capital goods sent to job-worker subject to the fulfilment of the following conditions:
The capital goods, after completion of job-work, are received back by him within 3 years of their being sent out.
The principal can take credit of capital goods even if such capital goods are sent directly to job-worker’s place without bringing to principal’s place of business.
If the capital goods are not received back within 3 years, it shall be deemed that such capital goods had been supplied by principal to the job worker on the day when the said capital goods were sent out.
Procedures listed in respect of inputs under Rule 45 of the Central Goods and Service Tax Rules,2017 will equally apply to capital goods also (refer above).
Given that non-receipt of inputs or capital goods within a period of one year and three years respectively would be deemed to be a supply as on the date on which goods were originally dispatched to the job worker, it is preferred that a principal raises a tax invoice and supplies the goods against such invoice at the time of original supply, if he is certain that such goods would not be received within the period specified above. This would enable the principal from having to bear the burden of interest, as interest would be calculated from the date on which the goods were originally dispatched and not from the date on which the period of one year or three years, as the case may be, expires.
Some experts are of the view that unless the Principal is ‘registered’, the activity would not be ‘job-work’. And when the supply – treatment or process – is not job-work, then it would also not be eligible to be classified under HSN 9988 in the Annexure – Scheme of Classification of Services. Although the nature of work performed is the same whether the Principal is registered or not, the classification of supplies would need to be based on another suitable HSN code in chapter 99 because paragraph 3, Schedule II does refers to ‘another person’s goods’ and not ‘another registered persons goods’. Hence, due to the registration status of the Principal, the treatment or process may or may not qualify as job-work but in either case, the work of the supplier would continue to be ‘treated as supply of services’ though not under HSN 9988. It must be noted that while every manufacture may encompass ‘process or job-work’ every job-work need not necessarily result in manufacture. It is for this reason that in the rate notification manufacturing services has been separately mentioned for work carried out on “physical inputs owned by others”.
Treatment of process undertaken may or may not result in manufacture (section 2(72)) where processing of raw material or inputs that results in the emergence of a new product. Whether it results in manufacture or not, the treatment or process would always be ‘treated as supply of services’ in view of the mandate specified in paragraph 3, schedule II.
Now, ‘goods belonging to another’ does not mean 100% of the goods required in the job -work must be provided by the Principal. It is common, and often inevitable, for the job-worker to apply his own goods. Goods required for job-work can generally identified as primary, secondary and ancillary material. If the job-worker applies ancillary material in the course of carrying out the treatment or process, the transaction does not cease to be job-work. Similarly, if the Principal provides only ancillary material, it is not justifiable to regard the transaction as job-work. Hence, a reasonable construction of the definition of paragraph 3, schedule II requires the Principal to provide the ‘primary material’ at least to qualify a transaction to be termed as ‘job work’. Although there are no infallible tests or undisputed guiding principle or no one-rule can be prescribed -the classification into primary-secondary-ancillary itself is a subjective matter. Reasonable construction is required based on the role, each component plays in relation to the finished product in terms of function and identity to determine ‘goods belonging to another’ correctly.
Please note that job-working must not be confused with repair or maintenance. Job-working creates the functionality of an article but repair or maintenance restores or improves the functionality already created and possessed by that article or thing.
As regards ‘movement of goods’ by Principal to job-worker, it is not a supply for the reason that the ingredients required to constitute supply (as detailed in the explanation of clause (a) to (d) under section 7(1)) are not satisfied. It is for this reason that section 19(3) and 19(6) is required to ‘deem’ this movement of goods to be a supply in the event of failure of job-worker to return processed goods within the permitted time (1 year for inputs and 3 years for capital goods, respectively) . Further, 19(3) and 19(6) ‘deem’ it to be a supply not on the date of expiry of the permitted time to return them, but retrospectively on the date when the inputs / capital goods were originally sent ‘for’ job-work.
Deeming fiction is capable of providing a meaning that is otherwise not available to a work or phrase. Deeming fiction is used with great caution by the law-maker and when it is used, its construction must be with the same caution and seriousness. Hence, ‘movement of goods’ for the purpose of job-work is not supply but is ‘deemed’ to be a supply by failure of a contingency or condition-subsequent.
It is section 16 and not section 19 that allows input tax credit, but section 19 permits availment of input tax credit even when the inputs (or capital goods) are not first received at the premises of the Principal but delivered directly to job-worker. Section 19 also does not deny or recover the input tax credit already availed by the Principal on the occasion of sending them to the job-worker. When movement of goods for job-work is not a supply, where is the need for a provision to permit continuation of credit that was already availed validly. Since credit has been availed, failure to use the inputs (or capital goods) as ‘intended’ under section 16(1)would cause a break-down of the credit scheme – to allow credit only when the said goods are subsequently supplied and are taxable. And for this reason, transfer of business assets on which credit availed is ‘declared’ to be supply in paragraph 1, schedule I and diversion for non-business use (in certain cases) is ‘treated’ as supply in paragraph 4(a) and 4(b), schedule II. But there is no provision to impute supply characteristics to ‘movement of goods for job – work’. This responsibility is cast by section 19(3) and 19(6), respectively.
This can be contrasted with the ‘time of supply’ of goods sent-on-approval under section 31(7). Here, the date of acceptance by customer (or end of 6th month) is recognized as supply and hence registers ‘time of supply’. It is interesting to note that there is deeming fiction employed here because none is required. In other words, ‘sending goods on approval’ is not a supply for the same reason that the ingredients required to constitute supply (as detailed in the explanation of clause (a) to (d) under section 7(1)) are not satisfied. And such a test can validly be applied for verifying whether ‘movement of goods for job-work’ is supply or not. By applying the same test to ‘sending goods on approval’, the ‘time of supply’ is not the date of sending them but the date of their acceptance by customer (or end of 6th month).