Levy of service tax on processing of goods under BAS

PJ/CASE STUDY/2012-13/16

28 July 2012

Introduction:

Business Auxiliary Services – Appellant’s activity of Grinding and smoothening of the edges by clipping of rough iron castings on job work does not amount to manufacture rather it can only be called processing which was not amount to manufacture and not taxable during the period of dispute. During the period of dispute the wordings of clause (v) of Section 65 (19) of Finance Act, 1994 did not cover processing of goods on job work basis which got covered by this clause, when the same was substituted by "production or processing of goods for, or on behalf of, the clients by Sections 65(19) and 65(105)(zzb) of Finance Act, 1994.

RATHOUR ENGG. WORKS v/s COMMISSIONER OF C.EX., CHANDIGARH [2012 (27) S.T.R. 37 (Tri.-Del.)]

Relevant Legal Provisions:

·         Section 65(19)(v)“business auxiliary service” means any service in relation to, —
Production or processing of goods for, or on behalf of the client;

·         Section 65(105)(zzb)"taxable service" means any [service provided or to be provided ],-
‘to a client, by [any person] in relation to business auxiliary service.’

Brief Facts:

-       The appellants are engaged in the activity of grinding and smoothening the edges by clipping of rough iron castings on job work. There is no change of shape or size of the castings in this process and there is no dispute that this process does not amount to manufacture. The point of dispute is as to whether during the period from 10-9-04 to 28-2- 05, this activity of the appellants attracted service tax as "Business auxiliary service" (production of goods on behalf of the client which does not amount to manufacture) under Section 65(105)(zzb) read with Section 65(19)(v) of the Finance Act, 1994.
-       Though the jurisdictional Deputy Commissioner, Central Excise, vide order-in-original dated 31-8-2009 held that the appellant's activity is not taxable under Section 65(105)(zzb) read with Section 65(19)(v) of the Finance Act, 1994, as the same stood during the period of dispute, on Revenue's appeals to C.C.E. (Appeals), the Deputy Commissioner's order was reversed vide order-in-Appeal No. 190-194/ST/Appl/CHD-I/2010 dated 24-12-2010 and service tax demands of Rs. 1,00,557/-, Rs. 33,222/-, Rs. 1,04,958/- and Rs. 29,401/- were confirmed against the appellants - M/s. Rathour Engg. Works; M/s. Bhagat Agro Industries; M/s. Sahil Engg. Works and M/s. Raghu Engg. Works respectively along with interest and beside this, penalties were also imposed on them under Sections 76, 77 and 78 of the Finance Act, 1994. Against this order of C.C.E. (Appeals), these appeals along with stay applications have been filed.

Appellant’s Contention:

-       The assessee contended that during the period of dispute i.e. from 10-9-04 to 15-6-05, the taxable entry in Section 65(19)(v) was "production of goods on behalf of clients which does not amount to manufacture under Section 2(f) of Central Excise Act, 1944", that this entry did not cover production on job work basis but was applicable only when for production, a person was engaged by another for processing of goods entrusted by a third person, that the appellant's activity became taxable w.e.f. 16-5-05 when clause (v) of Section 65(19) was replaced by the entry - "production or processing of goods, for, or on behalf of, the client" that during the period of dispute, the appellant's activity was not taxable under Section 65(105)(zzb) read with Section 65(19)(v).
-       In this regard he relies upon the judgments of the Tribunal in cases of Auto Coats v. CCE, Coimbatore reported in 2009 (15) STR 398(Tri.-Chennai), M/s Gedee Weiler Pvt. Ltd. v. CCE., Coimbatore reported in 2010 (18) S.T.R. 417 (Tri.-Chennai) and Sonic Watches Ltd. v. C.C.E., Vadodara reported in 2011 (21) S.T.R. 34 (Tri.-Ahmd.), that these judgments are squarely applicable to the facts of these cases, and that in view of this, the impugned order is not sustainable.

Issue Involved:

The issue involved in this case was that-
Whether during the period from 10-9-04 to 28-2- 05, the activity of the appellants attracted service tax as "Business auxiliary service" under Section 65(105)(zzb) read with Section 65(19)(v) of the Finance Act, 1994?

Order of the CESTAT: -

v The CESTAT held that though these matters were listed for hearing of the stay applications, after hearing the same for sometime, they were of the view that the matter the appeals themselves can be taken up for final disposal. Accordingly with the consent of both the sides, their appeals were taken up for final disposal after waiving the pre-deposit.

v Further they held that since the appellants carry out the process of grinding and smoothening the edges, called fettling of the rough castings, received from principal manufacturers who clear the goods after carrying out further processes, there is no dispute that this activity of the appellants does not amount to manufacture, it can only be called processing not amounting to manufacture, which was not taxable during the period of dispute. They also agree with the appellant's plea that as held by the Tribunal in cases of M/s. Auto Coats v. C.C.E., Coimbatore (supra), M/s. Gedee Weiler Pvt. Ltd. v. C.C.E., Coimbatore (supra) and M/s. Sonic Watches v. Vadodara (supra) during the period of dispute, the wordings of Clause (v) of Section 65(19) of the Finance Act, 1994 did not cover processing of goods on job work basis which got covered by this clause, when the same was substituted by - "production or processing of goods for, or on behalf of, the clients." In view of this, the impugned order is not sustainable. The same is set aside.

Decision:
The appeals were allowed.
Conclusion:

The department contended that processing carried out by the appellant does not amount to manufacture and hence was liable for service tax under BAS category. But even if it does not amount to manufacture but word “production or processing on behalf of client” was incorporated from a later date. Hence the job work will be covered from this date only. Hence the prior to the same, the job work is not taxable.
But the definition in negative list has been changed. Now the “production or manufacture” of goods on job work basis will be in negative list. The “production” is more than processing but less than “manufacture”. The department will say that the production and manufacture are one and same thing and they are used interchangeably. But it is not the case as both the words are being used in same definition? Let us wait and watch for the outcome. We have also written an article on this controversy.

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PJ/CASE STUDY/2012-13/16
28 July 2012

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