Whether job work resulting in manufacture can be leviable to service tax under BAS ?

Case:- JUBILANT INDUSTRIES LTD. VERSUS COMMISSIONER OF C. EX., GHAZIABAD

Citation:- 2013 (31) S.T.R. 181 (Tri.- Del.)

Brief facts:- The appellant is successor in interest of a company by name Pace Marketing Specialties Ltd. (“PMSL” for short). The matter in dispute in this appeal is about liability to service tax on certain activities carried out by PMSL during the period April 2007 to Nov. 2010. There were two Show Cause Notices which had been adjudicated by the impugned order. SCN dated 28-10-2010 related to the period April 2007 to March 2010 and SCN dated 18-3-2011 related to April 2010 to 14-11-2011. Demand for service tax amounting to Rs. 1,31,93,416/- on account of first SCN and Rs. 29,02,873/- on account of second SCN are confirmed along with interest and penalties.
After filing the appeal before the Tribunal, the appellant filed a petition for withdrawing the appeal in respect of the normal period of limitation, that is 1-10-2009 to 14-11-2010, involving service tax demand of Rs. 49,18,625/- and wanted to contest only the demand beyond the normal period of limitation. Initially the Tribunal refused permission for such partial withdrawal vide Misc. Order No. ST/M/244/2012-Cus., dated 13-6-2012. The appellant filed a writ petition before the Hon’ble Allahabad High Court vide Writ Tax Number 973 of 2012. The High Court vide order dated 14-8-2012 set aside the said order and ordered that Tribunal should take note of Section 86(4) of Finance Act, 1994 and pass appropriate order on merits.
The Appellant entered into an agreement with Jubilant Life Sciences Ltd. (“JLSL” for short) under which they agreed to manufacture excisable goods from raw materials to be supplied by them. 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. The processing charges were fixed in manner so as to ensure recovery of minimum amount towards fixed expenses incurred by the appellant for processing the goods irrespective of the volume of production. The fixed charges included the expenses in the nature of salary to staff, wages to workers, depreciation on all assets, security charges, legal and professional expenses, travelling and conveyance, stationery and telephone etc. Apart from the above, certain variable charges were also recovered which were fixed after taking into consideration the power and fuel, contract workers, repairs of machinery, consumable stores etc. and were linked to the volume of production.
Since their entire factory was to be used for manufacturing activity using raw materials supplied by JLSL and JLSL was willing to clear the goods on payment of excise duty from the appellants factory, the appellants 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 JSPL was surrendered and new registration taken in the -name of JLSL and they were paying excise duty on goods manufactured and cleared from the appellants’ factory.

Appellant’s contention:- The Authorized Representative for the appellant submits that the activity that was done by appellant (earlier known as PMSL) amounted to manufacture of excisable goods and excise duty on such goods was being paid by Jubilant Life Sciences Ltd. It is contested that manufacturing of excisable goods was not subjected to service tax. Such activity was specifically mentioned in “Business Auxiliary Services” defined under Section 65(19) and excluded from the scope of service tax levy and therefore it is argued that it could not be subjected to tax under the head for “Business Support Services” introduced with effect from 1-5-2008 under Section 65(104c).

The appellants also argue that no suppression of facts can be alleged against the appellants because the entire activity was made known to the department when the agreement between PMSL and JLSL was placed before the department and Excise registration for manufacturing in the factory owned by PMSL was changed from the name of PMSL to JLSL as advised by the departmental authorities. Further if at all PMSL was to pay service tax, JLSL could have taken credit of such tax paid and utilized while paying excise duty on the excisable products. Thus there would have been no additional revenue collection and no additional cost component to the parties involved and therefore the allegation regarding intention to evade payment of tax is baseless. It is also pointed out that the audit team initially wanted to demand service tax under the category of “Renting of Immovable Property”. But later when SCN was issued the demand was made under “Business Support Services” which fact shows that the officers themselves were not clear on the taxability or classification of service and in such circumstances extended period could not be invoked.

Respondent’s contention:- Revenue was of the view that PMSL was providing “Business Support Services” as defined under 65(104c) made taxable under Section 65(105)(zzzq) of Finance Act, 1994. The Show Cause Notices demanding service tax are issued on such basis. These provisions read as under:

Section 65[(104c).“support services of business or commerce” means services provided in relation to business or commerce and includes evaluation of prospective customers, telemarketing, processing of purchase orders and fulfilment services, information and tracking of delivery schedules, managing distribution and logistics, customer relationship management services, accounting and processing of transactions, Operational or administrative assistance in any manner, formulation of customer service and pricing policies, infrastructural support services and other transaction processing.
Explanation. - For the purposes of this clause, the expression “infrastructural support services” includes providing office along with office utilities, lounge, reception with competent personnel to handle messages, secretarial services, internet and telecom facilities, pantry and security;]
Section 65(105)(zzzq).“taxable service” means any service provided or to be provided, to any person, by any other person, in relation to support services of business or commerce, in any manner;

The agreement dated 1-4-2007 between the two parties shows the scope of work, attendant obligations and terms of payment as under :

“Scope of Work

PMSL shall from the effective date hereof 1st April 2007, commence manufacturing, packing and testing of the products at its facilities, on behalf of the JUBILANT, of such specifications as specified by JUBILANT from time to time. The processing of the products will be carried out under supervision and control of JUBILANT and in accordance with the manufacturing process, instructions, supervision & control of JUBILANT from time to time. The following are included in the scope of manufacturing, packing and testing :
(i) Unloading and storage of raw materials, packaging materials and any other materials required to manufacture the products. The testing of raw materials will be done by PMSL in presence of manager/officer of Jubilant in accordance with the specifications provided by JUBILANT.
(ii) Storing and loading of finished goods and dispatch as per the instructions given by the JUBILANT and under direct supervision & control of Manager/Officer of Jubilant.
(iii) Assistance to JUBILANT to compile accounts regarding receipt, consumption and inventory of raw materials, packaging materials, in process materials and finished goods and comply with the process of Central Excise Act, 1944 and Rules made thereunder including registration of the premises in the name of Jubilant under the supervision & control of Manager/Officer of Jubilant since Jubilant is the manufacturer under Section 2(f) of the Central Excise Act, 1944. PMSL shall be responsible for maintenance of Excise records on behalf of JUBILANT under the supervision & control of Manager/Officer of Jubilant.
(iv) Compliance of the legal formalities for manufacturing of products e.g. compliance under the Factories Act, * * * * * Petroleum Act, 1934 and Petroleum Rules, 1976, Water (Prevention and Control of Pollution) Act, 1974, Air (Pollution and Control of Pollution) Act, 1981, Labour and Industries Laws, Environment (Protection) Act, 1986, U.P.T.T. Act (if applicable) etc.”

Raw Materials and Packaging Materials
2.1 All the raw materials and packaging materials required for manufacturing of the products will be provided by JUBILANT. Such materials may be supplied by JUBILANT directly from the suppliers of JUBILANT or from the JUBILANT’s plant and warehouses. PMSL shall assist JUBILANT in maintaining a detailed inventory statement of raw materials, packaging materials, WIP and finished products.
2.2 The materials may be duty paid or non-duty paid. Any loss suffered by JUBILANT due to non-availment of CENVAT benefits due to failure on the part of PMSL will be borne by PMSL.

Quality
3.1 PMSL will test all the raw materials and packaging materials in accordance with the specification laid down by JUBILANT whether such materials are received directly from the suppliers of JUBILANT or from JUBILANT in the presence of manger/officer of JUBILANT.
3.2 JUBILANT shall have its own personnel at PMSL’s facilities- to check the quality reports relating to the receipt and acceptance of the materials.
3.3 PMSL will manufacture and pack the products strictly in accordance with the formulations laid down by JUBILANT and test the products in accordance with the specifications given by JUBILANT. JUBILANT shall have its own personnel at PMSL’s facilities to check the quality reports relating to the products and in case of any doubts about the quality of product may order retesting of the products under its supervision.
3.4 However, if the finished products manufactured by the PMSL do not meet the specification laid down by JUBILANT then the same will be reprocessed/reconditioned/repacked by PMSL at its cost subject to compliance of Central Excise provisions in this regard.

Despatch

4.1 PMSL will produce and supply the finished goods to JUBILANT’ depot or directly to the customers of JUBILANT as per the instructions given by JUBILANT from time to time and under the supervision and control of manager officer of JUBILANT.

4.2 JUBILANT will have the right to disposal of the scrap of packing and raw materials, intermediates and the products arising during the course of manufacturing and PMSL shall assist in maintaining the records for generation and sale of such scrap.

Payment

5.1 PMSL will be paid the job work charges for processing, packing and testing of finished products for JUBILANT at the rates mutually agreed from time-to-time after deducting tax at source, if any, under Income tax Act/Rules. Jubilant will avail CENVAT credit of excise duty paid on all the inputs and input services used for manufacture of the products and will be responsible for payment of excise duty on the products.

5.2 PMSL will provide earmarked space and communication facilities to JUBILANT’s personnel for coordination of purchases, logistics, supervision of storage and consumption of raw, packing and other process materials, production planning and supervision, and quality control, warehousing of products and their dispatch.

5.3 JUBILANT will make payment within 30 days from the date of receipt of Bill for job charges after reconciling the complete accounts of manufactured products. However, JUBILANT will pay an interest free advance to PMSL equal to the amount, required to cover three months job charges.”

In the matter of invoking extended period the ld. AR for Revenue relied on paras 47.14 and 47.15 of the impugned order and argued that the appellant was providing service in the grab of job-work and deliberately accounted the charges received by them from JLSL as “job charges”. Though the contract was disclosed to the department the contract nowhere shows that they were to charge fixed costs and variable costs separately which fact demonstrates the true nature of the contract. This fact came out only during audit of the books of accounts of the appellant. He submits that the appellant did not take out registration for paying service tax and non-payment of tax could be detected only through audit of their books and hence there was suppression of information.

Reasoning of judgment:- Having considered arguments on both sides, the Tribunal explained whole case as under:

They are in agreement with the contention that the same activity cannot be considered as manufacturing and subjected to excise levy and at the same time considered to be a service and subjected to service tax. This principle does not need much discussion and is also recognized under Section 65(19) of Finance Act, 1994 levying service tax on processing of goods not amounting to manufacture. Process amounting to manufacture is kept specifically out of the scope of the entry. That being the case such an activity cannot be brought under service tax levy under “Business Support Service” because the underlying principle will apply to this entry also. The specific exclusion is not seen under 64(104c) for the reason that the legislature intended to deal with the issue under Section 65(19). The Tribunal find that Revenue is also not disputing the position that manufacturing activity cannot be subjected to service tax. Revenues contention is that what JLSL was doing was manufacturing and what appellant (earlier known as PMSL) was doing was support services.

So the essential question to be determined is whether the impugned activity can be split into two - one as manufacturing by JLSL and the other as service by appellant (earlier known as PMSL) to JLSL. While considering this issue another issue that arises is whether there can be two manufacturers for the same goods. In the instant case JLSL claimed to be the manufacturer and the claim was accepted by Central Excise Department and JLSL was paying excise duty. In such circumstances is there any scope for PMSL to claim that their activity should also be considered as manufacturing activity in respect of the same goods?

Theyhave perused the contract dated 1-4-2007 between the two parties. It is seen that as per the contract JLSL was supplying all the raw materials required for manufacturing final products. JLSL was also 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 was done by appellant (earlier known as PMSL). This means that both the parties were involved in the manufacturing activity. It is also to be noted that such manufacturing arrangements are very common in the country. In such situation legal provisions exist in Central Excise laws for considering either of the two parties as manufacturer. In most cases the persons 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. Notification 214/86-C.E. is applicable in such cases.

Section 2(f) of Central Excise Act defines manufacture and manufacturer as under :
“manufacture” includes any process, -
(i)     incidental or ancillary to the completion of a manufactured product;
(ii)    which is specified in relation to any goods in the Section or Chapter notes of the First Schedule to the Central Excise Tariff Act, 1985 (5 of 1986) as amounting to manufacture; or
(iii)   which is specified in relation to any goods in the Section or Chapter notes of the First Schedule to the Central Excise Tariff Act, 1985 (5 of 1986) as amounting to manufacture; or which, in relation to the goods specified in the Third Schedule, involves packing or repacking of such goods in a unit container or labelling or re-labelling of containers including the declaration or alteration of retail sale price on it or adoption of any other treatment on the goods to render the product marketable to the consumer;

and the word “manufacturer” shall be construed accordingly and shall include not only a person who employs hired labour in the production or manufacture of excisable goods, but also any person who engages in their production or manufacture on his own account;

Therefore if either party was to apply for registration as a manufacturer the department would have accepted the application. Excise registration is only to the effect that one of the parties undertakes to discharge the excise duty liability on the goods manufactured. This cannot be interpreted to mean that the activity done by the other party is not manufacturing activity. Notification 214/86-C.E. only provides a mechanism by which the duty liability is fixed on the person supplying raw material and enables the clearance of the goods from the factory of actual manufacture 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 Notification 214/86-C.E.

Theyfurther find that the predominant activities for manufacture were done by appellant (earlier known as PMSL). Their plant and machinery was used and their employees were doing the processes. In the matter of deciding who is the manufacturer of excisable products, ownership of raw materials is not a critical criterion. They do not see any merit in the argument of Revenue that the activities of making available the factory and infrastructure and doing activities of raw material handling, accounting etc. are to be considered as activities distinct from manufacturing activity. All the activities done by the appellants have to be seen together and when it is so seen it is clear that they were doing manufacturing activity. For reasons already explained, the fact that PLSL was paying excise duty does not lead to a legal position that the appellant (earlier known as PMSL) was not doing manufacturing activity.

The fact that appellant (earlier known as PMSL) was charging two components towards job-charges separated as fixed cost and variable cost cannot alter this situation so long as goods were manufactured. In a situation where goods were not manufactured but charges were collected under the fixed component it could have been considered as a service. While working out cost of any manufactured product costing is done by splitting cost elements into fixed cost and variable cost and that cannot change the nature of the activity. What could have changed the nature of the activity is a situation where no manufacturing activity took place and still the appellant collected their charges.

They also do not find merit in Revenue’s argument regarding suppression of facts. The contract was placed before the department from the very beginning when JLSL took Central Excise registration. The Department did not raise any issue at that time. The contention of Revenue is that the fact that they were charging separately for fixed costs and variable costs was not disclosed to the department. As already stated they are of the view that this aspect could not actually change the nature of the activity.

In view of the analysis as above they hold that the activities under taken by the appellant during the period April 07 to Sept. 09 being a manufacturing activity carried out cannot be classified as business support service and subjected to service tax and hence the demand fails. This demand fails on account of time-bar also because they are of the view that all relevant facts have been disclosed to the department in time. So this part of the appeal is allowed.

For the period 1-10-2009 to 14-11-2010 the appeal is dismissed as withdrawn.

Decision:- Appeal allowed.

Comment:- The essence of this case is that when any process amounts to manufacture leviable to excise duty, then said process cannot be leviable to service tax as an activity can either be considered as manufacture or service. Moreover, the activity that amounts to manufacture was specifically excluded under BAS and so no service tax was payable on the job charges charged by the job worker for undertaking process that amounted to manufacture of excisable and dutiable goods.

Prepared By: Kushal Shah

Comments

PJ/CASE LAW/2014-15/2554

Post a Comment

Query