NO SERVICE TAX ON MANUFACTURING ACTIVITIES

[Dr. Sanjiv Agarwal]

Service Tax is levied on services of 'production or processing of goods, for or on behalf of the client' under the category of business auxiliary services as per section 65(19) of Finance Act, 1994. It would also  cover  services which are  incidental or auxiliary to such production or processing but does not include any activity that amount to 'manufacture' as defined in section 2(f) of Central Excise Act, 1944.

What is Manufacture

According to Section 2(f) of the Central Excise Act, 1944, "Manufacture" includes any process—

(i) incidental or ancillary to the completion of a manufactured product;

(ii) which is specified in relation to any goods in the Section or Chapter notes of the First Schedule to the Central Excise Tariff Act, 1985 as amounting to manufacture; or           

(iii) which, in relation to the goods specified in the Third Schedule, involves packing or repacking of such goods in a unit container or labeling or re-labeling of containers including the declaration or alteration of retail sale price on it or adoption of any other treatment on the goods to render the product marketable to the consumer.

and the word "manufacturer" shall be construed accordingly and shall include not only a person who employs hired labour in the production or manufacture of excisable goods, but also any person who engages in their production or manufacture on his own account.

The definition under section 2(f) is an inclusive definition and it should be construed in its natural meaning and interpretation which will include any process incidental or ancillary to the completion of manufacture of a product. The manufacture should result in change of raw material and finished goods must be different from the goods that existed just before the process of manufacture. There must be transformation of a product and a new and different article must emerge having distinct characteristics

Analysis of Section 2(f)

·   Section 2(f) does not define what 'manufacture' is

·   it only provides inclusions

·  Manufacture means to bring into existence new substance and does not mean merely to produce some change in a substance. The produce which arises out of the process must be commercially a distinct commodity different from that out of which it is processed. The nature and extent of processes may vary from case to case. When a change takes place and a new and distinct article comes into existence known to consumers and the commercial community as a commercial product, which can no longer be regarded as the original commodity, such a change constitutes manufacture [UOI v. DCM 1977 (l) ELT J199 (SC)]

·  Processes, however elaborate they might otherwise be, would not amount to manufacture unless at the end of it a commercially new and distinct article emerges [UOI v. Parle Products 1994 (74) ELT 492 (SC)]

·  Production and Manufacture, both are used in juxtaposition.

·  Manufacture is turning out of raw material into something altogether different [Aluminium Corporation v. Coal Board, AIR 1959, Calcutta; Empire Industries]

·  Manufacture takes place as soon as there is transformation of one commodity into a distinct and separate new commodity.

·  Production refers to application of human skill or labour in some form to make a material.

·  'Produced' involves some expenditure of human skill and labour but does not necessarily involve the transformation of raw material into a different commodity [Empire Industries v. UOI AIR 1986 (SC )662]

This definition of manufacture also gets explained by some judicial decisions. In Union of India v. Parle Products 1994 (74) ELT 492 (Supreme Court), it was held that processes could not amount to manufacture unless at the end of it a commercially new and distinct article emerges. Supreme Court in Union of India v. DCM 1977 (l) ELT J199 observed that manufacture used as a verb means to bring into existence a new substance and does not mean merely to produce some change in a substance. In other words, the produce which arises out of the process must be commercially a distinct commodity different from that out of which it is processed. Whether or not something results in manufacture would depend on the facts of the case. It is well settled that a question as to when a manufacture of product takes place within the meaning of Section 2(f) of the Act is a mixed question of law and fact. The nature and the extent of processes may vary from case to case. When a change takes place and a new and distinct article comes into existence known to the consumers and the commercial community as a commercial product, which can be no longer regarded as the original commodity, such a change constitutes manufacture.

In Kwal Pro Exports v. Assistant Commissioner of Income Tax, (2008) 297 ITR (A T) 49 (ITAT, Jodhpur) in a case relating to direct taxes (section 10B exemption), the words - manufacture, production and processing have been interpreted as under :-

The essence of "manufacture" is the change from one object to another for the purposes of making it marketable with the aid and employment of men, machinery and material. Every change in the raw material cannot be characterised as manufacture unless a new product, which has a separate commercial identity in the market, comes into being. There must be such a transformation that a new and different article must emerge having distinct name, character and use. If the original commodity continues to remain the same after undergoing processes and is called by the same name, it cannot be said there is manufacture of an article or thing. Thus the main test is to decide whether the identity of the commodity, before and after undergoing various processes changes or remains the same in the commercial world.

The word "produce" is wider than "manufacture" and includes within its ambit not only activity of manufacturing the material by applying human endeavour on some existing raw material but also securing certain produce from natural element, for example, by growing plants on soil, or by operating mines and the like or for example, by milching the cow the milkman produces milk though he has not applied any process on any raw material for the purpose of bringing into existence the thing known as milk. The word "production" includes within its purview the word "manufacture" and also activities.

The term "processing" has to be distinguished from "manufacturing" in the sense that a mere processing does not ordinarily make the thing to undergo a change losing its original identity, whereas in "manufacturing" the original article loses its identity and a thing differently known or recognised in common parlance comes into existence.

In CCE, Gujarat v. Pan Pipes Resplendents Ltd. (2006) 193 ELT 129 (Supreme Court), it was held that the process for amounting to manufacture must be one, which brings into being a new substance known to the market. Manufacture implies a change but every change is not a manufacture and yet every change in an article is the result of some treatment, labour and manipulation. For manufacture, some thing more is necessary. There must be transformation and a new article must result, having a distinct name, character or use. In the instant case, it was held that decorated glazed ceramic tiles after their decoration did not result in change in basic character, i.e., glazed tiles and therefore, did not undergo a process of manufacture.

In Commissioner of Central Excise, Hyderabad II v. Aldec Corporation (2005) 188 ELT 241 (Supreme Court), it was held that the twin tests contemplated by excise laws for an activity to be a manufacture is that goods must not only be manufactured but they should also be capable of being marketed (as per section 3 of Central Excise Act, 1944). It also held that whether an article has been manufactured or not as per section 2(f) of Central Excise Act depends on whether the article in question satisfies test as laid down in relevant chapter heading or sub-heading and is known as such in the commercial community. Whether a process, taken singly or jointly constitutes a 'manufacture' on first principles or under section 2(f) is to be determined having regard to the facts and circumstances.

In Hindustan Poles Corporation v. CCE, Kolkata 2006 -TMI - 371 - SUPREME COURT, it was held that an activity of merely joining of three pipes, one with other, of different dimensions to obtain a desired length could by no stretch of imagination be brought within the category of 'manufacture' as such process did not change basic identity or original character of M.S. welded pipe to make it a new marketable product leading to 'manufacture' as defined under section 2(f) of Central Excise Act, 1944. Even though the joints of the three sections of the pole are welded during the course of making the joints and the resultant pole is painted by using of paints and varnishes before delivery, nothing was mentioned about the using of electric are welding used for welding the joints as also of paints and varnishes used for painting although it was found on scrutiny of the balance sheet that a regular and recurring expenses is incurred for (a) cutting and welding, and (b) paints and varnishes for painting." The process undertaken by the appellants was merely joining pipes of three different dias one with the other to desired length whereby no new goods and/or article other than pipes does emerge out inasmuch as even after such process of joining the pipes one with the other they do not lose their identity as M.S. Welded pipes and thus does not attract the mischief of section 2(f) of the Act, since the process of mere welding of pipes of three different dias one with the other is not a process of manufacture within the meaning of section 2(f) of the Act. The Apex Court held as under —

The various judicial pronouncements have crystalised the meaning of manufacture which had been left undefined in the Act. It is now established that for a process to be called manufacture, following essential characteristics must exist —

(a)   The new product should emerge as a result of change in inputs with new characteristics and products

(b)   Any process creating some thing else with distinct name, character and use would be called manufacture (to be a new product is not a necessary condition)

(c.)  It is necessary for the output to lose the identity as an input.

(d.)  The process should be incidental or ancillary to the manufacture not to sale

(e.)  Value addition to a product is not a manufacture.

(f.)   Mere bestowing of labour is not a manufacture.

(g.)  Excise duty is leviable only when a distinct product emerges falling under different tariff entry.

In Commissioner of Customs & Central Excise vs. Phil Corporation Ltd 2008 -TMI - 2970 - Supreme Court of India it was held that HSN which contain a list of all possible goods that are traded is a safe grade for deciding issue of classification. Mention of an item in HSN has nothing to do with its manufacture or taxability. In case of deemed manufacture, courts have to make serious endeavor to ascertain spirit and intention of Parliament while enacting such provisions and once legislative intention is gathered, then the burden duty and obligation of court is to decide the case is consonance with legislative intention.   

In CCE Mumbai v. BOC (I) Ltd   2008 -TMI - 4462 - SUPREME COURT, where helium gas was procured form other manufacturers labels affixed and sold under own brand name and packing form bulk packs to retail packs not undertaken, it was held that mere packing for marketing or mere labeling or relabeling without repacking from the bulk packs to retail packs does not render the product marketable directly to consumer and it does not amount to manufacture.

Thus, if the activity is not a manufacture, it could be production or processing and hence liable to service tax. Those activities which involve working upon  raw material or semi finished goods so as to complete part or whole of production subject to such production not amounting to manufacture would be liable for levy of service tax.

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