2025 (7) TMI 281 - AT - Service Tax

Nature of activity - Process amounting to manufacture or Business Auxiliary Services - activity of procuring raw material (milk) from suppliers and subjecting the same to the process of chilling cut open of bulk packing pasteurisation standardization and packing into pouches for retail sale - HELD THAT - The period in dispute is October 1 2011 to March 2013 which falls both in the pre-negative and post-negative era. The provisions during the pre-negative era has been discussed above. With reference to the post-negative period provisions of Section 66D provides for the negative list and clause (f) during the relevant period puts the manufacturing process outside the net of service - In view of the provisions of law including the Chapter Note and the interpretation placed by the various decisions we are of the view that the activities carried out by the appellant in respect of raw milk amounts to manufacture and therefore stands excluded by the express terms of Section 65(19) of the Act. The contention raised by the learned Authorised Representative for the Department that the facts of the present case are identical to the case of M/s Jai Durga Ice Factory 2025 (3) TMI 848 - CESTAT NEW DELHI is not correct as the process in that case was exclusively of chilling of milk during the post-negative period. Since the issue has been decided in favour of the appellant it is not necessary to go into the other contentions regarding limitation etc. The impugned order is unsustainable and is hereby set aside - Appeal allowed.

Summary

The core legal questions considered by the Tribunal in the present appeals are:

1. Whether the activity of procuring raw milk and subjecting it to processes such as chilling, cut open of bulk packing, pasteurisation, standardization, and packing into retail pouches constitutes 'manufacture' under the Central Excise Tariff Act, 1985, or whether it falls within the ambit of providing 'Business Auxiliary Service' ("BAS") taxable under Section 65(105)(zzb) read with Section 65(19) of the Finance Act, 1994.

2. Whether the show cause notice issued demanding service tax on the said activities is valid, including the question of limitation and invocation of extended period of limitation.

3. Whether the benefit of Small Scale Industry (SSI) exemption applies to the appellant for the relevant period.

Issue-wise Detailed Analysis

Issue 1: Classification of the activity as 'Manufacture' or 'Business Auxiliary Service' (BAS)

Legal framework and precedents: The Tribunal extensively examined the definition of 'manufacture' under Chapter Note 6 of Chapter 4 of Schedule-I to the Central Excise Tariff Act, 1985, which states that labelling, relabelling, repacking from bulk to retail packs, or any other treatment to render the product marketable amounts to manufacture. The Tribunal also referred to Section 65(19) of the Finance Act, 1994, which defines "business auxiliary service" and explicitly excludes any activity amounting to manufacture of excisable goods from the scope of BAS.

Relevant case law includes the Tribunal's decision in Shri Vrindavan Dairies versus Commissioner of Central Excise and Service Tax, Jaipur, where it was held that pasteurization and packing from bulk to branded consumer packs clearly amounts to manufacture. This decision was relied upon to reject the contention that such activities constitute BAS.

Court's interpretation and reasoning: The Tribunal observed that the processes undertaken by the appellant-chilling, separation, standardisation, pasteurisation, and packing-transform raw milk into a marketable product. This transformation falls squarely within the ambit of 'manufacture' as per the Chapter Notes and the Central Excise Act's definition. The Tribunal emphasized that the definition of manufacture is wide and unambiguous, and the activity cannot be bifurcated to treat some processes as manufacture and others as services.

The Tribunal further clarified that since the activity amounts to manufacture, it is expressly excluded from the definition of BAS under Section 65(19). The Tribunal rejected the Department's argument that the activity is a service under BAS, noting that the exclusion of manufacture from BAS is clear and leaves no room for alternative interpretation.

Key evidence and findings: The appellant's process involved multiple stages beyond mere packing, including chilling, pasteurisation, and standardisation, all of which have been judicially recognized as manufacturing processes. The Tribunal distinguished the present case from others where only chilling was involved without possession or processing of milk.

Application of law to facts: Applying the legal provisions and judicial precedents, the Tribunal concluded that the appellant's activities amount to manufacture and not BAS. Therefore, service tax under BAS was not leviable.

Treatment of competing arguments: The Department relied on a decision in Jai Durge Ice Factory to contend that the activity was BAS. However, the Tribunal distinguished that case on facts, noting that in Jai Durge, the appellant only provided chilling facilities without taking possession or processing the milk, whereas here the appellant undertook multiple processing steps amounting to manufacture.

Conclusion: The Tribunal held that the appellant's activity constitutes manufacture and is excluded from BAS service tax levy.

Issue 2: Validity and limitation of the show cause notice

Legal framework: The show cause notice demanded service tax along with interest and penalties invoking the extended period of limitation under Sections 77 and 78 of the Finance Act, 1994.

Court's interpretation and reasoning: Since the Tribunal found the activity to be manufacture and not a service, the demand of service tax itself was unsustainable. Consequently, the question of limitation or extended period of limitation did not require detailed adjudication.

Conclusion: The Tribunal declined to delve into limitation issues as the fundamental demand was held invalid.

Issue 3: Applicability of SSI exemption

The adjudicating authority had granted SSI exemption for the year 2011-12, reducing the demand. The Department challenged this, but the Tribunal did not specifically revisit this issue as the primary classification issue was determinative.

Significant Holdings

"The processes on the raw milk of chilling and then subjecting the milk to the process of separation, standardisation, and pasteurisation and then packing it into pouches makes the milk marketable. Such process has been held to be 'manufacture' in several decisions of the Tribunal and the contention of the Department that it amounts to service under the category of 'BAS' has been rejected."

"As can be seen from the provisions of Section 65(19) that the 'BAS' does not include any activity that amounts to manufacture of excisable goods. Since the activity of chilling, separation, pasteurization, standardization, and packing in pouches have been held to be manufacture, the same is excluded from the purview of service under the category of 'BAS'. The terms of the Section are clear and unambiguous."

"We are of the view that the activities carried out by the appellant in respect of raw milk amounts to manufacture and, therefore, stands excluded by the express terms of Section 65(19) of the Act."

"Since the issue has been decided in favour of the appellant, it is not necessary to go into the other contentions regarding limitation etc. In view of our discussion above, the impugned order is unsustainable and is hereby set aside."

The Tribunal reaffirmed the principle that any process which renders a product marketable, including pasteurisation and packing from bulk to retail packs, qualifies as manufacture under the Central Excise Tariff Act, 1985. Consequently, such activities are excluded from the scope of business auxiliary services taxable under the Finance Act, 1994. The Tribunal's decision conclusively held that the appellant's activities are manufacturing processes and not taxable services under BAS, thereby setting aside the demand of service tax and related penalties.