We are sharing with you an important judgement of the Hon’ble CESTAT, New Delhi, in the case of Jubilant Industries Limited Versus CCE, Ghaziabad [2013 (9) TMI 358 – CESTAT NEW DELHI] on following issue:
Issue:
Whether the same activity can be considered as manufacturing and subjected to excise duty and at the same time considered to be a service and subjected to service tax?
Facts & Background:
Jubilant Industries Limited (“the Appellant”) is successor in interest of a company by name Pace Marketing Specialties Ltd. (“PMSL”). The Appellant entered into an agreement with Jubilant Life Sciences Ltd. (“JLSL”) under which they agreed to manufacture excisable goods from raw materials to be supplied by JLSL. The terms of the agreement entered into between JLSL and the Appellant clearly show that the Appellant was processing goods for JLSL and the manufacturing activity was entirety carried out by the Appellant in the presence of the managerial staff of JLSL. All the materials required for carrying out the processing activity were supplied by JLSL. The products once processed were either supplied to JLSL’s depot or directly to the customers of JLSL on payment of excise duty.
As a consideration for carrying out the aforesaid activities, the Appellant recovered processing charges from JLSL which had a fixed and a variable component. Since their entire factory was to be used for manufacturing activity and JLSL was willing to clear the goods on payment of excise duty from the Appellant’s factory, the Appellant consulted the Excise Department as to who should be registered for discharging excise duty liability. With the advice and consent of the Department officials, the Excise registration in the name of the Appellant was surrendered and new registration taken in the name of JLSL and they were paying excise duty on goods manufactured and cleared from the Appellant’s factory.
Revenue was of the view that the Appellant was providing “Business Support Services” as defined under 65(104c) of the Finance Act, 1994 (“the Finance Act”) made taxable under Section 65(105)(zzzq) of the Finance Act. Accordingly two Show Cause Notices (“SCN”) were issued – SCN dated October 28,-2010 related to the period April 2007 to March 2010 and SCN dated March 18, 2011 related to April 2010 to 14-11-2011 demanding service tax amounting to Rs. 1,31,93,416/- on account of first SCN and Rs. 29,02,873/- on account of second SCN, which were confirmed by the Department along with interest and penalties.
Being aggrieved by the aforesaid Order, the Appellant preferred an appeal before the Hon’ble CESTAT, New Delhi.
Held:
It was held by the Hon’ble CESTAT that the same activity cannot be considered as manufacturing and subjected to excise duty and at the same time considered to be a service and subjected to service tax. This principle is also recognized under “Business Auxiliary Services” defined under Section 65(19) and excluded from the scope of service tax levy and therefore, Process amounting to manufacture is kept specifically out of the scope of service tax. Thus, in the instant case manufacturing activities undertaken by the Appellant are not exigible to service tax even under “Business Support Service” instead chargeable to excise duty.
The Hon’ble CESTAT held that as per the contract, JLSL was supplying all the raw materials required for manufacturing final products, supervising the manufacturing process and was taking steps to ensure the quality of the products. All activities like handling the raw materials, its accounting and processing were done by the Appellant. This means that both the parties were involved in the manufacturing activity. In such situation legal provisions exist in Central Excise laws for considering either of the two parties as manufacturer. In most cases, the person doing the job-work claims to be the manufacturer and pays excise duty as applicable in his hands. There are situations where the person supplying raw materials undertakes to pay excise duty and for that reason excise duty is not charged in the hands of the person doing the manufacturing activity vide Notification 214/86-C.E. (“the Notification”) is applicable in such cases.
However, the Notification only provides a mechanism by which the duty liability is fixed on the person supplying raw material (JLSL in this case) and enables the clearance of the goods from the factory of actual manufacturer subject to undertaking for payment of duty by the other party or its further use in the manufacture of excisable goods. In a situation, where the other party (JLSL in this case) was willing to pay excise duty at the time of clearance of the goods from the factory of manufacture, there was no need to adopt the procedure laid down in the Notification. Therefore, the fact that JLSL was paying excise duty does not lead to a legal position that the Appellant was not doing manufacturing activity.
Furthermore, the Hon’ble CESTAT held that the Appellant was charging two components towards job-charges separated as fixed cost and variable cost cannot alter this situation so long as goods were manufactured. However, in a situation where goods were not manufactured but charges were collected under the fixed component, it could have been considered as a service.
Therefore, on the basis of the above judgment, the Hon’ble CESTAT allowed the appeal in favour of the Appellant.
Important to Note:
Post Negative list regime effective from July 1, 2012, “any process amounting to manufacture or production of goods” is also falling under one of the Negative list of Services under Section 66D(f) of the Finance Act.
Further, “process amounting to manufacture or production of goods” means a process on which duties of excise are leviable under Section 3 of the Central Excise Act, 1944 or the Medicinal and Toilet Preparations (Excise Duties) Act, 1955 or any process amounting to manufacture of alcoholic liquors for human consumption, opium, Indian hemp and other narcotic drugs and narcotics on which duties of excise are leviable under any State Act for the time being in force.
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Bimal Jain
FCA, FCS, LLB, B.Com (Hons)
Mobile: +91 9810604563
E-mail: bimaljain@hotmail.com
Author Bio
The issue is very clear and well settled from the very beginning. It is the unlawful aggression of the Service Tax Department in the regime & jurisdiction of other well settled taxes on specific transactions/events like sale of goods or manufacturing of goods. Service Tax being a new law is unreasonably trying to put its foot in the specified and exclusive jurisdiction of other Indirect Tax Laws. The pro revenue approach of the Service Tax Department administered without any specific law, but by circulars and clarifications. Unfortunately, these Circulars and Clarifications has been un-questionably accepted by the tax payers and unfortunately also by the tax professionals has created all the confusion. As far as the issue of taxability of software is concerned, the ‘Standard Software’ saleable over the counter is covered under the term ‘Goods’ and is taxable at the point of its sale liable to VAT/Sales Tax, while an specifically designed/tailor made software developed for specific need of a client is service and should be exclusively subjected to Service Tax. Similary the work contract even though involve a portion of service, but has been included as ‘Deemed Sales’ in the Constitution of India, so it cannot be treated as ‘Service’, but should be subjected to tax under VAT/Sales Tax Law of the State. The Central Government do not have any legal power under the Constitution of India to tax composite works contract which involves transfer of property in goods during its execution. As a Tax Professionals, we must exercise our own judgment rather than demanding a clarification from pro-revenue officials of the department of Service Tax who of course opine in favour of revenue which is very natural and also they are duty bound towards the Government to which they are serving.
1. Mfg/Processing and job work on behalf of a separate entity are separate and distinct. Decision to a great extent address a bona fide issue. Intermingling of these issues under Works contract, Service Tax, Right to Use, Excise duty, sales tax and confusion on the points have been leading to a great hardship in day to day routine.. A clearer guidelines and line of demarcation is required to uunderstand these issue and simply the compliance under relevant and applicant head avoiding blow of double taxation or multiple point liability under these provisions leading to a great hardship and harassment.
Regards
AK Bhargava
09425157452
1.In the same way, sale and service are two distinct business transactions. In case of computer software, it is considered both at the same time and hence service tax and sales tax, both are applied. This should be set right.
2. Also in case of works contracts, Service tax has to be paid on 60% of the value of Contract, whatever (70%, 80% or so) may be the material component on which sale tax is applied. Ideally sum of Sale + Service in a works contract should be 100%.
I wish other knowledgeable persons could comment on the above.