Manufacturing Process Cannot Be Taxed as Service: CESTAT Quashes Service Tax Demand of Rs. 18.37 Lakh in Job Work Dispute [Read Order]

The Principal Bench of Customs, Excise & Service Tax Appellate Tribunal (CESTAT) at New Delhi, held that activities accepted as “manufacture” for excise duty cannot be reclassified as services to levy service tax. The principal manufacturer had duly informed the department and paid excise duty without objection. Accordingly, the ₹18.37 lakh service tax demand along with interest and penalty was set aside.

The Appellant, M/s Essem Polyalloys (P) Ltd., filed this appeal against the Order-in-Appeal dated 26.11.2019 passed by the Commissioner (Appeals), Alwar, which upheld the Assistant Commissioner's order dated 28.02.2018.

The Appellant, registered as a manufacturer and service tax assessee, undertook job work for M/s Machino Polymers Ltd., Haryana, manufacturing "Polymer Master Batch." The principal supplied raw materials and intimated the Central Excise Superintendent about the arrangement. Upon completion, the appellant returned the goods to the principal, who paid central excise duty on the manufactured goods.

The Assistant Commissioner confirmed a service tax demand of Rs. 18,37,183/- under section73(1) of the Finance Act, 1994, along with interest and equal penalty, for the period 01.04.2014 to 30.09.2016, based on a Show Cause Notice dated 13.07.2017. During audit, the department concluded that the appellant's processes did not amount to manufacture and were liable to service tax.

The Counsel for the Appellant, B.L. Yadav, submitted that it undertook manufacturing processes for which the principal paid central excise duty and the intimations were filed by the principal on 09.05.2014 and by the appellant from 01.04.2014. Sub-contracting part of the work does not constitute a separate taxable service, as there was no direct relationship between the principal and sub-contractor.

Further, the Counsel stated that the same activity cannot be treated simultaneously as manufacture (attracting excise duty paid by the principal) and as a service (attracting service tax). Thus, no service tax was payable, and the demand with interest and penalty should be set aside.

On the other hand, the Authorised Representative for the Respondent, Aejaz Ahmad, submitted that the appellant rendered services by processing goods which did not amount to manufacture. The actual manufacturing was undertaken by the appellant's sub-contractor. Thus, the appellant was liable to pay service tax on the services rendered, and the appeal should be dismissed.

The Tribunal consisted of Judicial Member, Binu Tamta and Technical Member, P. V Subba Rao, heard and reviewed the matter.

The Tribunal, after considering the submissions made, found that the principal had intimated the department about the manufacturing arrangement and paid central excise duty, which the department accepted without objection. The same processes accepted as manufacture for excise duty cannot be reclassified as non-manufacturing to levy service tax.

Further, the Tribunal stated that processes amounting to manufacture were in the negative list under section 66D(f) and exempt from service tax during the relevant period and held that sub-contracting work contrary to the agreement is a contractual dispute between the parties.

Accordingly, the Tribunal set aside the impugned order and allowed the appeal filed.

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