The Delhi bench of the Customs, Excise & Service Tax Appellate Tribunal(CESTAT) in the case of Fab India Limited, held that no service on penalty or compensation was received for any loss or damage caused by breach or non-performance of contract.
The appellant is engaged in the manufacturing of readymade garments and made-up articles of textile falling under Chapters 62 and 63 and was paying Excise Duty @ 2% under the Notification No. 9/2016-CE dated 01.03.2016 without availing the cenvat credit.
The records of the assessee were subjected to audit and it was found that some footwear items falling under Chapter 64 from various vendors were sold after affixing their brand name “Fab India” without payment of duty. The appellant was therefore liable to pay an excise duty of Rs. 6,08,901/-.
During the audit, it was also observed that the appellant had received an amount of Rs. 47,20,817/- in view of penalties from their vendors during the period October 2014 to June 2017 and as per the provisions of Section 66E of the Finance Act, 1994 were liable to pay service tax amounting to Rs. 7,04,381/-.
The Adjudicating Authority relying on the definition of “manufacture” under Section 2(f)(iii) of the Central Excise Act and in terms of the various clauses of the agreement executed by the appellant with their vendors concluded that the activity of affixing “Fab India” label, MRP tags, barcode on the footwear amounts to “deemed manufacture” as the label, tags and barcodes are the property of the appellant and were to be affixed as per their specifications and hence is liable to pay the excise duty.
The Counsel for the appellant has alternatively relied on the Notification No. 214/86-CE dated 25.3.1986 to say that incidental activity of manufacture carried out by vendors on behalf of the appellant was as job workers then the liability has to be on the job worker and the appellant cannot be made liable to pay the duty.
On the second issue of non-payment of Service Tax on fine and penalty received by the appellant from their vendors instead of deficiency in the supply of goods on account of quality or late delivery, the learned Counsel submitted that it was not on account of any independent activity but is in the form of mechanism for settlement of the price of goods.
Since the vendor is not rendering any services to the appellant, the receipt of penalty towards the supply of goods does not amount to “agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act”. The appellant is not liable to pay the service tax thereon. The provisions of Section 65B(44) of the Finance Act provide that “service” means any activity carried out by another for consideration, and includes the declared service. The term “declared service” has been defined under Section 65B(22) of the Finance Act as any activity carried out by a person or another person for consideration and declared as such under Section 66E.
A perusal of the contents of the agreement executed by the appellant with their vendors does not show that the agreement is for providing any services for which any consideration has to be paid.
The single member bench of Ms Binu Tamta, Member (Judicial) set aside the demand towards excise duty and also the service tax on the appellant and consequently demand of interest and penalty and allowed the appeal.
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