2025 (6) TMI 1584 - AT - Service Tax

Entitlement for service tax exemption as per N/N. 08/2005-ST dated 01.03.2005 as amended by N/N.19/2005-ST dated 16.06.2005 in respect of the job work activities - Business Auxiliary services - extended period of limitation - HELD THAT - As regards invoking of the extended period of limitation there is no finding given by the Adjudication authority regarding invoking of the extended period of limitation hence no view expressed regarding the demand invoking the extended period of limitation. On merit on going through the findings given by the Adjudication authority where it is held that prior to 16.06.2005 the assessee was in production of goods for the client and not on behalf of the clients as per the definition of Business Auxiliary Service as it existed the said activity was not a taxable activity under Business Auxiliary Service prior to the amendment. It is clarified vide Circular No. 80/10/2004/S.T dated 17.09.2004 that production of goods not amounting to manufacture are taxable. Due to change in the definition of Business Auxiliary Service the Production or processing of goods for or on behalf of the client became a taxable activity however was exempted under Notification No. 08/2005-ST dated 01.03.2005 as amended once the job-worked goods are returned to the client who uses the same in the manufacture of the final goods which are cleared on payment of duty. Hence it is held that the assessee is not liable to pay any Service Tax on the Services provided by him. Further as no liability of tax arises the question of interest and penalty does not arise. Conclusion - i) The Respondent is eligible for the benefit of Notification No. 08/2005-ST dated 01.03.2005 and no service tax is payable by Respondent as demanded in the show cause notice. ii) The demand raised without classifying the impugned activity under Business Auxiliary Service and treating the declared value as taxable value is unsustainable. iii) As no liability of tax arises the question of interest and penalty does not arise. The appeal filed by the Revenue is dismissed.

Summary

The core legal questions considered in this appeal revolve around the applicability of service tax on job work activities carried out by the Respondent, specifically:

1. Whether the Respondent's activities of silver finishing, cubic painting, and related processing on semi-finished goods amount to a taxable 'Business Auxiliary Service' under Section 65(19) of the Finance Act, 1994.

2. Whether the Respondent is entitled to exemption from service tax under Notification No. 08/2005-ST dated 01.03.2005, as amended by Notification No. 19/2005-ST dated 16.06.2005, in respect of the job work activities.

3. The interpretation of the definition of 'Business Auxiliary Service' before and after the amendment dated 16.06.2005, particularly the distinction between "production of goods for the client" and "production on behalf of the client."

4. The validity of the demand raised by the Department without classifying the impugned activity under the "Business Auxiliary Service" and the method of valuation used for service tax demand.

5. Whether invocation of the extended period of limitation for service tax demand is sustainable.

Issue-wise Detailed Analysis

1. Taxability of the Respondent's Job Work Activities as 'Business Auxiliary Service'

The legal framework involves Section 65(19) of the Finance Act, 1994, which defines 'Business Auxiliary Service' and the relevant notifications and circulars interpreting its scope. The Tribunal considered the definition as it stood from 10.09.2004 to 16.06.2005, which covered "production on behalf of the client" but did not explicitly include "production for the client."

The Court noted that the Respondent received semi-finished goods from manufacturers and processed them (silver finishing, cubic painting, lacquering) before returning them. The Department contended that these activities did not amount to manufacture under Section 2(f) of the Central Excise Act, 1944, and thus attracted service tax as 'Business Auxiliary Service'.

However, the Tribunal relied on precedents including the decision in the case of Auto Coats Vs. CCE Coimbatore, where it was held that activities undertaken directly for customers and not on their behalf did not attract service tax prior to 16.06.2005. The Tribunal emphasized that the Respondent's activities were "production of goods for the client" and not "on behalf of the client," and thus not taxable under the definition prevailing before the amendment.

Further reliance was placed on decisions such as Pearl Packaging and Veesons Energy Systems, and Board's letter F.No.B1/6/2005-TRU dated 27.07.2005, which clarified the scope of 'Business Auxiliary Service' and supported the Respondent's position.

2. Applicability of Notification No. 08/2005-ST (Exemption Notification)

The Tribunal examined Notification No. 08/2005-ST dated 01.03.2005 and its amendment by Notification No. 19/2005-ST dated 16.06.2005, which exempted service tax on production or processing of goods for or on behalf of the client subject to conditions:

• Goods must be produced or processed using raw materials or semi-finished goods supplied by the client.
• Processed goods must be returned to the client.
• Goods produced or processed must be used in the manufacture of final products liable to excise duty (not nil or exempted).

The Respondent demonstrated compliance with these conditions: semi-finished goods were supplied by reputed automotive manufacturers, processed as per specifications, and returned to the clients. The final products were excisable and cleared on payment of duty. Thus, the exemption notification applied fully, rendering the service tax demand unsustainable.

3. Legality of the Demand and Method of Valuation

The Department's Show Cause Notice (SCN) demanded service tax without classifying the activity under 'Business Auxiliary Service' and proposed to treat the entire declared value of services as taxable. The Tribunal referred to a recent decision (Indian Machine Tools Manufacturers Association Vs. CCE Panchkula) holding that such a method of demand is unsustainable.

This reasoning undermined the Department's demand and supported the Respondent's contention that the demand was not properly framed and lacked legal basis.

4. Extended Period of Limitation

The Respondent challenged the invocation of the extended period of limitation for service tax demand, arguing absence of suppression or evasion. Reliance was placed on multiple Supreme Court decisions establishing that extended limitation applies only in cases of willful suppression or fraud.

The Tribunal observed that the Adjudicating authority had not made any finding on this issue and accordingly refrained from expressing any view on the invocation of extended limitation.

5. Interest and Penalty

Since the Tribunal concluded that no service tax liability arose, it followed that interest and penalty demands could not be sustained.

Significant Holdings

"Prior to 16.06.2005, the assessee was in production of goods for the client and not on behalf of the clients as per the definition of 'Business Auxiliary Service' as it existed the said activity was not a taxable activity under 'Business Auxiliary Service' prior to the amendment."

"By virtue of Notification No. 08/2005-ST dated 01.03.2005 as amended, the goods produced or processed on job work basis are fully exempted, if the conditions specified are satisfied."

"The Adjudication authority rightly held that the Respondent is eligible for the benefit of Notification No. 08/2005-ST dated 01.03.2005 and no service tax is payable by Respondent as demanded in the show cause notice."

"The demand raised without classifying the impugned activity under 'Business Auxiliary Service' and treating the declared value as taxable value is unsustainable."

"As no liability of tax arises, the question of interest and penalty does not arise."

"In view of the clear finding given by the Adjudication authority specifying the reasons for dropping the demand raised against the Respondent, we find no reason to interfere with the said findings."

The Tribunal dismissed the Revenue's appeal, upholding the exemption claim and rejecting the service tax demand on the job work activities of the Respondent. The decision clarifies the distinction in the scope of 'Business Auxiliary Service' before and after the amendment dated 16.06.2005 and affirms the applicability of the exemption notification when conditions are met, emphasizing the necessity of proper classification and valuation in service tax demands.