The Hindu Business Line : Machining for EOU

We are running a small-scale unit. We carry out grinding, drilling and other such operations on various machine components supplied by our customers on job-work basis. We collect only our labour cost. We were told by our customers that they carry out further operations in their factories on these goods and clear them by paying excise duty. One of our customers is, in fact, supplying such goods to an export-oriented unit after performing further machining operations. Recently, the excise officers inquired about our activities and told us that we have to pay service tax under the category of business auxiliary service. In our opinion we do not provide any service so as to attract service tax liability. Please advise.

One of the services listed under the category of business auxiliary services is the production or processing of goods for or on behalf of a client. But any such processing will exclude any activity that will amount to manufacture as per Central Excise law. The reason for such exclusion is that for such activities the manufacturer will be paying excise duty. The operations carried out by you do not appear to result in manufacture of any new component. Hence your processing activity will come under business auxiliary service and attract service tax.

At the same time, there is a tax exemption available in case the processed goods returned by you to your clients are used in further manufacturing operations as a result of which excise duty becomes payable on such goods. Conversely, if the goods are exempt from payment of excise duty, for example because of their supply to an export-oriented unite (EOU), then service tax exemption is not available.

Therefore, when your clients supply the goods processed by you to an EOU after carrying out further work at their end, you have to pay service tax for the processing undertaken by you. It also may be noted that the government has provided tax exemption to service providers who provide taxable service of aggregate value not exceeding Rs 4 lakh in any financial year. If the value of your taxable services is within the above limit then also you can claim exemption.

Send in your queries on Service Tax, Excise and Customs to MentorAtYourService@gmail.com.

S. MURUGAPPAN

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