Whether packaging that is statutorily required and forming part of manufacture, also leviable to service tax?

PJ/Case Law/2013-14/1655

Case:-NEW ERA HANDLING AGENCY Vs COMMISSIONER OF CENTRAL EXCISE, GOA

Citation:-2013-TIOL-975-CESTAT-MUM

Brief Facts:- The appellant are engaged in providing packaging activity services in relation to fertilizer manufactured by M/s. Zuari Industries Ltd., Goa, for which they received consideration. The department was of the view that the activity undertaken by the appellant would come within the purview of packaging services as defined in Section 65 (76b) of the Finance Act, 1994 and therefore, appellant are liable to pay service tax and accordingly a show-cause notice was issued to the appellant demanding service tax for the period 16/06/2005 to 31/03/2010 vide notice. The notice was adjudicated vide the impugned order and the demand was confirmed along with interest thereon and equivalent amount of penalty was also imposed apart from a penalty. Hence, the appellant filed appeal before Tribunal.

Appellant’s Contention:-The appellant submits that the Fertiliser (Control) Order, 1985 (FCO) governs the transaction relating to manufacture, sale and distribution of fertilizers and as per clause 19 of the said Order, there are restrictions on manufacture, sale and distribution of the fertilizers which read as follows. "No person shall himself or by any other person on his behalf sell, offer for sale, stock or exhibit for sale or distribute (i) any fertilizer the container whereof is not packed and marked in the manner laid down in this order; (ii) any fertilizer the label or container where bears the name of any individual firm or company purporting to be manufacturer of the fertilizer, which individual, firm or company is fictitious or does not exist". Further as per Clause 21, the requirement with regard to the packing and marketing are enumerated apart from the weight and size of the package. Thus, the packing of fertilizer is a statutory activity under the Fertilizer Control Order, without which the fertilizer cannot be marketed. Section 2(f) of the Central Excise Act, 1944 defines "manufacture" to include any process, incidental or ancillary to the completion of a manufactured product. The manufacture of fertilizer is complete only when the packaging is done. The definition of packaging activity in 65(76b) of the Finance Act, 1994, excludes packaging of fertilizer since the said section excludes any activity which amounts to manufacture under Section 2(f) of the Central Excise Act, 1944. He also relies on the decision of the Tribunal in the case of Afco Industrial & Chemicals Ltd., Vs. Collector of Central Excise and Customs, Pune, reported in 1987 (32) ELT 220 (Tribunal) wherein in respect of chemicals Barium Chloride and Barium Chloride Anhydrous, it was held that packaging is essential for completion of the manufacturing activities. Similarly, in the case of Flex Engineering Ltd., Vs. CCE, UP, reported in 2012 (267) ELT 153 (SC) - (2012-TIOL-01-SC-CX), the hon'ble apex Court held that if the product is not saleable, it will not be marketable and consequently process of manufacture is incomplete and excise duty would not be leviable on it. Applying the ratio of the above decisions to the facts of the present case, it can be seen that without packaging, fertilizers cannot be marketed and therefore, packaging is integrally connected with the completion of the manufacturing process and hence, the said activity falls squarely under Section 2(f) of the Central Excise Act, 1944. Besides, he relies on the decision of the Tribunal in the case of Commissioner of Central Excise, Ahmedabad Vs. Prem Conductor, reported in 2009 (15) STR 750 (Tri-Ahmd) - (2007-TIOL-2258-CESTAT-MUM) wherein the Tribunal held that even testing and inspection would form part of the manufacturing activity. In the light of these decisions, he prays for grant of stay against the impugned order.

Respondent’s Contention:- The Respondent on the other hand contends that the manufacture of fertilizer is complete even before they are packed and even after packaging, fertilizer remains fertilizer and therefore, the process of the packaging undertaken in the instant case will not come within the purview of "manufacture" as defined in Section 2(f) of the Central Excise Act, 1944.

Reasoning Of Judgment:- After considering the submissions made by both the sides, it was concluded that from the Fertiliser (Control) Order, 1985, it is clear that the fertilizer cannot be marketed without packaging, in the manner specified under the said order and thus packaging of fertilizer is a statutory requirement. If that be so, marketing of fertilizer cannot be take place without packaging. Under Section 2(f)(i) of the Central Excise Act, 1944, "manufacture" includes any process incidental or ancillary to the completion of a manufactured product. Thus the completion of fertilizer as a manufactured product would be over only when the packaging is completed. Without packaging, fertilizer cannot be marketed. Therefore, there is merit in the contention of the appellant that the activity of packaging undertaken in respect of fertilizer would form an integral part of the manufacturing activity and cannot be viewed as a service activity, especially in the context of the packaging activity as defined in Section 65 (76b) which excludes form its scope any activity of manufacture as defined in Section 2 (f) of the Central Excise Act, 1944. Thus, the appellant has made out a strong case in their favour against pre-deposit of the dues adjudged. Accordingly, we grant unconditional waiver from pre-deposit of dues adjudged in the impugned order and stay recovery thereof during the pendency of the appeal.

Decision:-Stay granted

Comment:- The analogy drawn from this case is that if packaging is statutory requirement for any product and accordingly, marketing of that product cannot be take place without packaging, then packaging activity is essential activity and will form part of the manufacturing activity. Accordingly, when the said packaging activity would amount to manufacture, it would be leviable to excise duty and service tax would not be leviable on the same.

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PJ/Case Law/2013-14/1655

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