2025 (5) TMI 1824 - AT - Service Tax

Demand of service tax under Business Support Services ( BSS ) - activity of processing/manufacturing products for GCPL - activity amounts to manufacture within the meaning of Section 2(f) of the Central Excise Act 1944 - Demand of along with interest and penalty - HELD THAT - Without prejudice it is submitted even if the activity undertaken by the Appellant does not amount to manufacture still service tax is not payable in view of the exemption provided vide Notification No. 8/2005-ST dated 01.03.2005 for the period prior to 01.07.2012 and Sl. No. 30(c) of Notification No. 25/2012-ST dated 20.06.2012 for the period post 01.07.2012. Such notification exempts payment of service tax on production or processing of goods which does not amount to manufacture provided that applicable excise duty is finally paid by the principal manufacturer. Therefore the impugned order confirming the demand of service tax is liable to be set aside on this ground alone. We find that in this case also the facts are similar to the case of M/s Winsor Fashion Private Limited (supra). The invoices raised by the appellant are similar to M/s Winsor Fashion Private Limited 2024 (3) TMI 238 - CESTAT KOLKATA . Therefore we find that as the issue is more res-integra in view of the decision of the Tribunal in the case of M/s Winsor Fashion Private Limited (supra) we hold that the demand of service tax is not sustainable against the appellant. Accordingly no penalty is imposable on the appellant. Thus we set aside the impugned order and allow the appeal with consequential relief if any.

Summary

Issues Presented and Considered

The core legal questions considered by the Tribunal are:

(i) Whether the appellant's activity of processing/manufacturing products for GCPL amounts to manufacture within the meaning of Section 2(f) of the Central Excise Act, 1944, or whether it constitutes provision of Business Support Services liable to service tax.

(ii) Whether the appellant, by undertaking manufacturing activities using raw materials, technical know-how, and machinery provided by GCPL, can be regarded as a manufacturer or merely a service provider.

(iii) Whether the demand of service tax under the category of Business Support Services is sustainable given that excise duty is paid by the principal manufacturer (GCPL) on the finished goods.

(iv) Whether the extended period of limitation under the proviso to Section 73(1) of the Finance Act, 1994 is invokable in the absence of any positive act of suppression by the appellant.

(v) Whether the demand of service tax is revenue neutral in the present circumstances and the implications thereof on the demand and penalty.

(vi) The applicability of relevant notifications exempting service tax on production or processing of goods which do not amount to manufacture, provided excise duty is paid by the principal manufacturer.

Issue-wise Detailed Analysis

Issue (i) & (ii): Nature of Activity - Manufacture or Business Support Service

The legal framework revolves around the definition of "manufacture" under Section 2(f) of the Central Excise Act, 1944, and the service tax provisions under the Finance Act, 1994, particularly the classification of Business Support Services and Business Auxiliary Services. The Tribunal examined whether the appellant's activity of processing products for GCPL is manufacture or taxable service.

The Tribunal relied heavily on precedents, notably the decision in the case of M/s Winsor Fashion Private Limited and M/s Neo Plast Private Limited v. CCE & ST, Guwahati, where it was held that similar activities undertaken for GCPL amounted to manufacture. The Tribunal emphasized that the appellant employed its own labor, used factory premises, and charged on a per-piece basis, all indicative of manufacturing activity rather than service provision.

The Tribunal noted that GCPL provided raw materials, technical know-how, and machinery but did not carry out the actual manufacturing. The appellant performed the physical transformation of raw materials into finished goods, which were then cleared by GCPL after payment of excise duty. The Tribunal found that the appellant was the de facto manufacturer, and the activity fell squarely within the definition of manufacture under the Central Excise Act.

The Tribunal also referred to the Board Circular F. No. 257/6/2005-CX.4 dated 15.07.2005, which clarified that production activities amounting to manufacture are not liable to service tax even if excise duty is not payable, reinforcing that the appellant's activity cannot be classified as a taxable service.

In addition, the Tribunal considered the agreement as a whole, invoking the principle from the Supreme Court decision in Super Poly Fabriks Ltd. v. CCE, Punjab, that a contract must be read in its entirety to discern the true nature of the transaction. The Tribunal concluded that the appellant's activities were manufacturing, processing, and packing of goods, not mere support services.

Issue (iii): Demand of Service Tax and Excise Duty Paid by Principal

The Tribunal observed that since excise duty was paid by GCPL on clearance of the finished goods, the appellant's activity could not be subjected to service tax under Business Support Services. The Tribunal relied on the negative list regime under Section 66D(f) of the Finance Act, 1994, which specifically excludes manufacturing activities from service tax liability.

The Tribunal also cited decisions where the Revenue had accepted that similar activities were not taxable services, reinforcing the principle that once a manufacturing activity has been recognized and excise duty paid, service tax cannot be levied on the same activity under the guise of Business Support Services.

Issue (iv): Extended Period of Limitation

The impugned order invoked the proviso to Section 73(1) of the Finance Act, 1994 to demand service tax for an extended period, alleging suppression of facts by the appellant. The Tribunal found no positive act of suppression or concealment by the appellant to justify invoking the extended period. It held that the demand should be restricted to the normal period of limitation.

Furthermore, the Tribunal relied on precedents establishing that the extended period cannot be invoked where the demand is revenue neutral, as in the present case, since any service tax paid would be available as Cenvat credit to GCPL.

Issue (v): Revenue Neutrality and Penalty

The Tribunal noted that any service tax paid by the appellant would have been available as Cenvat credit to GCPL, rendering the demand revenue neutral. Consequently, the Tribunal held that the demand for interest and penalty lacked foundation and was unsustainable.

It was also observed that the appellant did not suppress any information, negating the basis for penalty imposition.

Issue (vi): Applicability of Service Tax Exemptions

The appellant relied on Notification No. 8/2005-ST dated 01.03.2005 and Notification No. 25/2012-ST dated 20.06.2012, which exempt service tax on production or processing of goods not amounting to manufacture, provided excise duty is paid by the principal manufacturer. The Tribunal accepted this submission, holding that even if the appellant's activity did not amount to manufacture, it would still be exempt from service tax under these notifications.

Significant Holdings

The Tribunal's crucial legal reasoning includes the following verbatim excerpt from the precedent case of M/s Winsor Fashion Private Limited and M/s Neo Plast Private Limited:

"The relationship between Godrej Sara Lee and service provider is that of a principal manufacturer and supporting manufacturer in as much as the charges received are not measured in terms of value of the service rendered: instead it is measured in terms of conversion rates for the units of finished goods manufactured. This indicates that the principal activity for which charges are paid is conversion of goods out of the raw materials supplied by and in the category of principal manufacturer... the activity undertaken by them amounted to manufacture as defined in Section 2(f) of the Central Excise Act, 1944... the said activity cannot be considered to be a taxable service under the category of 'business auxiliary service' and accordingly is not liable to service tax."

The Tribunal established the core principle that where an entity undertakes the physical process of manufacturing using raw materials and machinery supplied by the principal, employing its own labor and charging on a per-unit basis, the activity amounts to manufacture under the Central Excise Act and is not subject to service tax under Business Support Services.

Further, the Tribunal concluded:

"As the activity undertaken by the appellant is identical which amounts to manufacture, in that circumstances, the appellants are not liable to pay Service Tax on their activity as the manufactured goods has suffered excise duty at the end of the principal. In that circumstances, we do not find any merit in the impugned orders. The same are set aside."

The Tribunal also held that the extended period for demand was not invokable due to absence of suppression and that penalty and interest demands were unsustainable given the primary demand was not maintainable.