INTRODUCTION
What is Job Work?
Job work has been defined under Section 2(68) of the Central Goods and Services Tax Act, 2017 (‘CGST Act’) as “any treatment or process undertaken by a person on goods belonging to another registered taxable person”.
Rule 2(n) of the CENVAT Credit Rules, 2004 further defines job work as working upon raw materials or semi-finished goods supplied to the job worker to complete a part or whole of the process resulting in the manufacture of an article or any essential operation for the end product.
What is a Job Work Agreement?
A job work refers to the process of working upon goods supplied in raw or semi-finished form, for undertaking any further processing. Thus, a job works agreement (JWA) is entered into between the job worker and the principal manufacturer to regulate the process of converting unfinished goods into finished goods by the job worker on performance of specific job work.
For any agreement to be a valid contract in India, it should follow the essential elements prescribed under the Indian Contract Act, 1872. Hence, a JWA should consist of an offer, acceptance, consideration, competent parties, legal object, and free consent.
DIFFERENCE BETWEEN A JOB WORKS AGREEMENT & A WORKS CONTRACT
Section 2(119) of the CGST Act defines “works contract” as “a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract”.
On comparing the above definitions of “Job Works” and “Works Contract”, a deduction can be made that a Works Contract has a restriction attached to it i.e. it is associated only with the immovable property, whereas, a JWA is associated with the processing of goods, i.e., movable property. Moreover, works contract pertains to the value addition in respect of materials. However, a JWA does not stipulate value addition per se in respect of materials, as it pertains to processing or treatment of semi-finished goods or raw materials.
SCOPE OF JOB WORKS AGREEMENT
In a clarification issued by the Central Board of Excise and Customs vide Circular No.38/12/2018 dated 26.03.2018, the Ministry of Finance laid down the ambit of job works under the CGST Act.
The Circular relied on the definition provided by Section 2(68) of the Act which states that the service as a job work is that of processing and treatment on the input goods which belongs to another registered person i.e., the principal manufacturer.
Thus, the scope of work under a JWA would include the processing or treatment of goods sent by the principal manufacturer to the job worker. However, the JWA may also stipulate that a job worker, in addition to the goods sent by the principal manufacturer, can use their own goods for carrying out the job delegated to them.
It is pertinent to note that the scope of JWA is not restricted to the definition accorded to it by the CGST Act, and may include corollary services which are interconnected with the main service of processing or treatment of semi-finished goods, as held by the Authority of Advance Ruling (West Bengal) in In Re: Vrinda Engineers Private Limited (WBAAR 14/2020).
KEY FEATURES OF A JOB WORKS AGREEMENT
IMPORTANT CLAUSES UNDER A JWA
1. Definitions
The JWA should clearly define specific terms which are associated with the operations to be undertaken for the job works. The following definitions are usually accorded to the below mentioned terms:
2. Scope of Work
The Scope of Work under a JWA should encompass the following factors:
3. Manpower Requirement
The JWA may stipulate the number of skilled and unskilled manpower to be engaged in the operations under the job work. It may also specify the types of manpower required, such as technical, scientific, non-technical, professional, ministerial or miscellaneous. The Agreement should provide for utmost compliance with the Factories Act, 1948 for the hiring of factory workers for the job works.
4. Terms and Conditions for the Job Work
Certain terms and conditions can be prescribed under the JWA, such as:
5. Terms of Payment
The JWA should clearly stipulate the terms of payment, including the due date for payment and the specific amount to be paid. Further, the terms of payment may also specify fulfilment of certain pre-requisites for the discharge of payment by the principal manufacture.
6. Taxes, Duties and Levies
Job workers are considered as a separate taxable person against the supply of goods by the principal and all supply of goods and services between the registered person/principal and the job worker shall be subject to the levy of tax under the CGST Act and the SGST Act. Therefore, the JWA should clearly specify the GST implications on the job work performed and the mode of payment of such GST.
The JWA can further stipulate that apart from GST, all VAT, duties, levies, etc. imposed by the State, Central Government and local bodies in connection with the job works should be paid by the job works company, which shall be later reimbursed by the principal manufacturer on the production of proof of payment.
AMLEGALS REMARKS
A contract is an integral aspect of any transaction and it is hugely vital to choose the correct agreement containing all the clauses which are required for the purpose of such transaction, in order to mitigate the chances of any future disputes.
A JWA is executed to engage a third party for processing or providing a particular treatment to a product for its final sale or consumption, which is distinct from the employee-employer relationship entered into through an employment agreement. Thus, JWAs should contain clauses specific to the scope of job works to be performed, distinct from the clauses contained in a works contract or an employment agreement.
A JWA helps protect the interests of both the job worker and the principal manufacturer, as it contains clauses which provide for dispute resolution, penalty, indemnity, warranty, terms of payment, etc. However, such clauses incorporated under a JWA should be with an object to regulate the processing or treatment to be performed on semi-finished goods or raw materials, in order to ensure that the job work promised by the job worker to the principal manufacturer is completed as per the requirement, within the set time period.
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