Fixed Charges under Loan License Agreement Not Taxable Separately as Declared Service: CESTAT [Read Order]

The Ahmedabad Bench of Customs, Excise and Service Tax Appellate Tribunal(ITAT)  ruled that fixed charges received under a Loan License Agreement for job work manufacturing cannot be taxed separately as a declared service under Section 66E(e) of the Finance Act, 1994.

Standard Pesticides Pvt Ltd,appellant-assessee,manufactured pesticides and chemicals under a Loan License Agreement with M/s. Biostadt India Limited. During an audit, the department found that between April 1, 2014, and January 31, 2016, the assessee collected ₹58,81,950 from Biostadt as reimbursement of fixed costs for agreeing not to use its plant and machinery for other parties.

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The department treated this act as a "declared service" under Section 66E(e) of the Finance Act, 1994, and issued a show cause notice on May 22, 2014, demanding ₹7,87,462 in service tax, along with interest and penalties.

The Assistant Commissioner, through an order dated April 18, 2017, dropped the charges. However, the department challenged this before the Commissioner (Appeals), who, through an order dated September 6, 2017, allowed the appeal and confirmed the service tax demand.

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A single member bench comprising C L Mahar(Technical Member) found that the Commissioner (Appeals) wrongly confirmed the service tax demand by misinterpreting Section 66F of the Finance Act, 1994. The tribunal held that the agreement in question was primarily for job work manufacturing, where fixed charges were an integral part of the job work cost. It ruled that the fixed charges were paid to maintain confidentiality and compensate for idle plant and machinery during lean periods, not for a separate declared service under Section 66E(e).

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The appellate tribunal relied on its previous ruling in Commissioner of Central Excise & Service Tax, Anand v. Standard Pesticides Pvt. Ltd. and other similar cases, where it was held that fixed charges linked to job work are part of the manufacturing cost and cannot be taxed separately as a service. Consequently, the CESTAT set aside the service tax demand.

In short,the appeal filed by the assessee was allowed.

To Read the full text of the Order CLICK HERE

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