Exemptions under Service tax are optional unlike Section 5A of CEA

We are sharing with you an important judgement of the Hon’ble High Court of Karnataka in the case of Commissioner of Central Excise Vs. Federal Mogul TPR India Ltd.[(2015) 59 taxmann.com 196 (Karnataka)] on the following issue:

Issue:

Whether it is justified on the part of jobworker to pay Service tax on its activity despite of Exemption Notification available under the Finance Act, 1994 (the Finance Act) and thereby passing on Service tax credit to the principal manufacturer?

Facts & Background:

Federal Mogul TPR (India) Ltd. (“FMTPR” or “the Respondent”) was engaged in manufacturing of Piston Rings etc., falling under Chapter 84 of the Central Excise Tariff Act, 1985. During the period from April 2007 to January 2008, FMTPR had sent Cenvat credit availed goods viz., Piston Rings in Coil form to their sister concern namely Federal Mogul Goetze India Ltd.(“FMGIL”) for chrome plating on job work basis under cover to material movement challans without reversing the Cenvat credit availed thereon. After completion of the process of chrome plating, FMGIL had returned the same to the Respondent under cover of an invoice on payment of Service tax on the value of job work charges. Subsequently on receipt of such job worked goods, FMTPR after undertaking various manufacturing processes cleared the same on payment of duty and accordingly availed Cenvat credit of the Service tax so passed on by FMGIL.

The Department contended that the activity of chrome plating was covered under the category of ‘Business Auxiliary Service’ and liable for payment of Service tax. However, in view of the Notification No. 8/2005-ST, dated March 1, 2005 (“the Exemption Notification”), the job work, which does not amount to manufacture was exempted from payment of Service tax provided that the job worked goods are further used in the manufacture of final products on which appropriate duty of Excise is discharged by the principal manufacturer. Accordingly, the Department denied availment of Cenvat credit to the Respondent, of the amount of Service tax so paid by FMGIL on the ground that FMGIL being a job worker without availing the benefit of Exemption Notification had paid Service tax and thus irregularly passed on the benefit of Cenvat credit to FMTPR.

Later on, the demand was upheld by the Ld. Commissioner. However, on appeal being filed to the Hon’ble Tribunal, the Hon’ble Tribunal decided the matter in favour of the Respondent by setting aside the demand. Being aggrieved, the Department preferred an appeal before the Hon’ble High Court of Karnataka contending that the Exemption Notification is unconditional and the provisions of Section 5A(1A) of the Central Excise Act, 1944 (“the Excise Act”) are applicable to the facts of the present case.

Held:

The Hon’ble High Court of Karnataka held as under:

• The Exemption Notification issued under Section 93 of the Finance Act is condition precedent. The applicability of the Exemption Notification shall be subject to the condition stipulated therein i.e., the principal manufacturer discharging the liability of appropriate duty of Excise on the manufactured goods;
• Mandatory requirement of “not to pay” the duty of Excise on goods exempted under Section 5(A)(1A) of the Excise Act is not found in Section 93 of the Finance Act;
• Absence of Section 5A of the Excise Act in Section 83 of the Finance Act, indicates that the provisions of Section 5A of the Excise Act are not applicable to the Finance Act.

Thus, the Hon’ble High Court held that the Exemption Notification is a conditional Notification and Section 5A(1A) of the Excise Act is not applicable to the present case. Therefore, payment of Service tax by job worker i.e. FMGIL and Cenvat credit availment by principal manufacturer i.e. the Respondent, was in order.