Dear Professional Colleague,
Same activity cannot be considered as manufacturing and service at a time
We are sharing with you an important judgement of the Hon’ble CESTAT, New Delhi, in the case of Jubilant Industries Limited Versus CCE, Ghaziabad [2013 (9) TMI 358 - CESTAT NEW DELHI] on following issue:
Whether the same activity can be considered as manufacturing and subjected to excise duty and at the same time considered to be a service and subjected to service tax?
Facts & Background:
Jubilant Industries Limited (“the Appellant”) is successor in interest of a company by name Pace Marketing Specialties Ltd. (“PMSL”). The Appellant entered into an agreement with Jubilant Life Sciences Ltd. (“JLSL”) under which they agreed to manufacture excisable goods from raw materials to be supplied by JLSL. The terms of the agreement entered into between JLSL and the Appellant clearly show that the Appellant was processing goods for JLSL and the manufacturing activity was entirety carried out by the Appellant in the presence of the managerial staff of JLSL. All the materials required for carrying out the processing activity were supplied by JLSL. The products once processed were either supplied to JLSL’s depot or directly to the customers of JLSL on payment of excise duty.
As a consideration for carrying out the aforesaid activities, the Appellant recovered processing charges from JLSL which had a fixed and a variable component. Since their entire factory was to be used for manufacturing activity and JLSL was willing to clear the goods on payment of excise duty from the Appellant’s factory, the Appellant consulted the Excise Department as to who should be registered for discharging excise duty liability. With the advice and consent of the Department officials, the Excise registration in the name of the Appellant was surrendered and new registration taken in the name of JLSL and they were paying excise duty on goods manufactured and cleared from the Appellant’s factory.
Revenue was of the view that the Appellant was providing “Business Support Services” as defined under 65(104c) of the Finance Act, 1994 (“the Finance Act”) made taxable under Section 65(105)(zzzq) of the Finance Act. Accordingly two Show Cause Notices (“SCN”) were issued - SCN dated October 28,-2010 related to the period April 2007 to March 2010 and SCN dated March 18, 2011 related to April 2010 to 14-11-2011 demanding service tax amounting to Rs. 1,31,93,416/- on account of first SCN and Rs. 29,02,873/- on account of second SCN, which were confirmed by the Department along with interest and penalties.
Being aggrieved by the aforesaid Order, the Appellant preferred an appeal before the Hon’ble CESTAT, New Delhi.
It was held by the Hon’ble CESTAT that the same activity cannot be considered as manufacturing and subjected to excise duty and at the same time considered to be a service and subjected to service tax. This principle is also recognized under “Business Auxiliary Services” defined under Section 65(19) and excluded from the scope of service tax levy and therefore, Process amounting to manufacture is kept specifically out of the scope of service tax. Thus, in the instant case manufacturing activities undertaken by the Appellant are not exigible to service tax even under “Business Support Service” instead chargeable to excise duty.
The Hon’ble CESTAT held that as per the contract, JLSL was supplying all the raw materials required for manufacturing final products, supervising the manufacturing process and was taking steps to ensure the quality of the products. All activities like handling the raw materials, its accounting and processing were done by the Appellant. This means that both the parties were involved in the manufacturing activity. In such situation legal provisions exist in Central Excise laws for considering either of the two parties as manufacturer. In most cases, the person doing the job-work claims to be the manufacturer and pays excise duty as applicable in his hands. There are situations where the person supplying raw materials undertakes to pay excise duty and for that reason excise duty is not charged in the hands of the person doing the manufacturing activity vide Notification 214/86-C.E. (“the Notification”) is applicable in such cases.
However, the Notification only provides a mechanism by which the duty liability is fixed on the person supplying raw material (JLSL in this case) and enables the clearance of the goods from the factory of actual manufacturer subject to undertaking for payment of duty by the other party or its further use in the manufacture of excisable goods. In a situation, where the other party (JLSL in this case) was willing to pay excise duty at the time of clearance of the goods from the factory of manufacture, there was no need to adopt the procedure laid down in the Notification. Therefore, the fact that JLSL was paying excise duty does not lead to a legal position that the Appellant was not doing manufacturing activity.
Furthermore, the Hon’ble CESTAT held that the Appellant was charging two components towards job-charges separated as fixed cost and variable cost cannot alter this situation so long as goods were manufactured. However, in a situation where goods were not manufactured but charges were collected under the fixed component, it could have been considered as a service.
Therefore, on the basis of the above judgment, the Hon’ble CESTAT allowed the appeal in favour of the Appellant.
Important to Note:
Post Negative list regime effective from July 1, 2012, “any process amounting to manufacture or production of goods” is also falling under one of the Negative list of Services under Section 66D(f) of the Finance Act.
Further, "process amounting to manufacture or production of goods" means a process on which duties of excise are leviable under Section 3 of the Central Excise Act, 1944 or the Medicinal and Toilet Preparations (Excise Duties) Act, 1955 or any process amounting to manufacture of alcoholic liquors for human consumption, opium, Indian hemp and other narcotic drugs and narcotics on which duties of excise are leviable under any State Act for the time being in force.
Hope the information will assist you in your Professional endeavors. In case of any query/ information, please do not hesitate to write back to us.
FCA, FCS, LLB, B.Com (Hons)
Released a Book - "Guide to Service Tax Voluntary Compliance Encouragement Scheme, 2013", authored by Bimal Jain, FCA, FCS, LLB
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