Pharma Job Work Manufacturing of Excisable Goods Not Classifiable as Renting of Immovable Property Service for levy of Service Tax: CESTAT [Read Order]

The Hyderabad Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) held that pharma job work manufacturing activity which amounts to manufacture of excisable goods cannot be treated as “Renting of Immovable Property Service” for levy of service tax.

Teena Labs Ltd, the appellant, is engaged in manufacture of bulk drugs and formulations. The appellant entered into a job work agreement with Aurobindo Pharma Ltd (APL) for manufacture of pharmaceutical products at the appellant’s factory on conversion basis.

Under the agreement, APL supplied raw materials while the appellant carried out manufacturing activity using its own factory, machinery and workers. The appellant received conversion charges every month and was also reimbursed expenses towards power, fuel, water, maintenance and salaries incurred during manufacturing.

The department viewed the arrangement as “Renting of Immovable Property Service” under the Finance Act, 1994. According to the department, the appellant had given its factory premises, plant and machinery to APL for exclusive use against monthly payments.

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The adjudicating authority confirmed the service tax demand by treating the conversion charges and reimbursements as rent for use of factory premises and facilities. Aggrieved by the order, the appellant approached the CESTAT.

The appellant’s counsel argued that the activity clearly amounted to manufacture under Section 2(f) of the Central Excise Act, 1944. They argued that the finished goods manufactured were excisable goods and the manufacturing activity was carried out by the appellant itself through its own employees. The counsel also argued that under “Business Auxiliary Service”, any activity amounting to manufacture is specifically excluded from service tax.

The appellant’s counsel further argued that there was no separate agreement for renting of immovable property and merely because conversion charges were paid in lump sum manner, the arrangement cannot be treated as renting of factory premises.

The revenue counsel argued that the agreement showed exclusive use of factory facilities by APL and the payment structure looked more like rental arrangement than normal job work charges. The department’s counsel argued that the appellant had effectively rented out its factory along with plant, machinery and other facilities to APL.

The two-member bench comprising A.K. Jyotishi (Technical Member) and Angad Prasad (Judicial Member) observed that there was no dispute that the activity undertaken by the appellant amounted to manufacture of excisable goods.

The tribunal observed that the appellant itself carried out conversion work, employed workers, paid salaries and complied with quality and pollution control requirements. The bench explained that although APL exercised control over production standards and quality, “it cannot be said that APL has taken over the entire facility of the appellant on rent along with machinery, manpower, raw material, associate services, etc.”

The tribunal also observed that in the pharmaceutical industry, manufacturing under loan licence and job work arrangements is common and such arrangements cannot automatically be treated as renting of factory premises only because lump sum conversion charges are paid.

The tribunal pointed out that there was no agreement between the parties for renting of immovable property and the activity was mainly conversion of raw materials into excisable goods on behalf of APL.

The tribunal explained that “the same activity cannot be considered as manufacturing and subjected to excise levy and at the same time considered to be a service and subjected to service tax.”

The tribunal held that the activity carried out by the appellant could not be classified under “Renting of Immovable Property Service” and no service tax was payable. The impugned order was set aside and the appeal was allowed.

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