Clarity needed on contract or job worker manufacturing

Manufacturers in India are permitted to sell their products through wholesale and/or retail (including through e-commerce) without seeking prior approval of the government. A long-time provision in the foreign direct investment (FDI) policy permits 100% foreign investment under the automatic route in the manufacturing sector.

Due to confusion over what constitutes “manufacturing”, the government, in 2015, defined manufacturing to mean “a change in a non-living physical object or article or thing, (a) resulting in transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character and use; or (b) bringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure”. Introduction of this definition was intended to ensure that Indian manufacturing companies which have received foreign investment undertake activities that change an object/thing to a new and distinct object/thing. It was aimed at curtailing activities where a company sourced products from third parties and only undertook limited activities such as packing, attaching stickers/logos, or minimal work which does not change the nature/character of the product and then claiming it was engaged in manufacturing.

It is a common commercial practice to outsource some or all manufacturing activities through contract manufacturing. If an Indian company only provides specifications and accepts final or near-final products which meet certain quality standards, this can be considered to fall outside the definition of manufacturing. It will constitute trading and accordingly the conditions attached to trading – wholesale, single-brand retail or multi-brand retail – should be applicable.

Sourav Kanti De Biswas is a partner at Shardul Amarchand Mangaldas & Co. The views and opinions expressed are solely those of the author and do not necessarily reflect the official view or position of the firm.