The Hindu Business Line : Wind on windmills

I am running a factory where I provide machining services to various clients. Material is given to us by the customer, which we return after processing. We charge service tax on the bill value if the end product does not suffer excise. However, a particular client is making windmills, which is an excise exempt item. When we asked for service tax to be paid, they state that as per the Act, if the product machined by us is being assembled directly without any further processing, service tax is not applicable. Is this true? How should we proceed in regard to this customer?

P. Vijay

Section 65(19) of Finance Act, 2006 defines business auxiliary services to include, inter alia, the following:

Production or processing of goods for, or on behalf of, the client;

Provision of service on behalf of client; and

A service incidental or auxiliary to above activities.

If the service provider undertaking any activity in relation to production and the following tests are satisfied, then it will qualify for the business auxiliary services:

The activity should not amount to manufacture; and

The service provider shall be engaged in any process of the production;

The activity has to be undertaken on behalf of another person (the client.)

Vide Notification No. 8/2005-ST of March 1,2005, exemption has been provided to a person producing goods, from inputs received from a manufacturer and sending the resultant product back to the same manufacturer for further manufacturing or processing of final products which are cleared on payment of excise duty. Thus, with effect from March 1,2005, exemption would be allowed only when production on behalf of clients results in manufacture under Section 2(f) of Central Excise Act, 1944 or job work is such where:

Raw material or semi-finished goods is received from the client (main manufacturer);

The goods produced are returned after doing the job required to the same client;

The said client uses the goods so returned in or in relation to manufacture of any other excisable goods;

Excise duty is payable on such goods (nil duty will not be considered); and

Such final goods are cleared after payment of excise duty.

The exemption is available only in cases where duty is paid by the manufacturer. In case of SSIs, exemption benefit can be claimed under Notification 8/2003-ST. If such benefit is taken, benefit under Notification 8/2005-ST cannot be taken for service tax purposes.

The definition does not compulsorily require the service provider to engage in production. Even those who merely undertake any process or activity are covered. An assembly of windmill is also a process and it is not the intent of law that processing should be construed so narrowly to exclude an assembly function of a windmill. It is a fact that a windmill cannot be produced or manufactured as per Section 2(f) of Central Excise Act and, therefore, a process involving assembly of a windmill shall be a taxable service under business auxiliary services.

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Sanjiv Agarwal

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