Manufacture under Chapter 87 cannot be reclassified as service merely because the finished goods are excise-exempt.

Body building on a chassis under Chapter 87 is treated as manufacture where Section Note 5 expressly deems building, fabrication, mounting, or fitting on a chassis to be manufacture of a motor vehicle. That character does not change merely because the finished goods are exempt from excise duty, so the activity cannot be reclassified as Business Auxiliary Service under the Finance Act, 1994 on that basis alone. The service tax demand, interest, and penalties therefore could not survive, and the assessee obtained relief.

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Issues: Whether body building on a chassis amounts to manufacture under Chapter 87 of the Central Excise Tariff Act, 1985, and therefore cannot be treated as Business Auxiliary Service under the Finance Act, 1994 merely because the finished goods were exempt from excise duty.

Analysis: Section Note 5 of Chapter 87 specifically provides that building a body or fabrication or mounting or fitting of structures or equipment on a chassis falling under heading 8706 amounts to manufacture of a motor vehicle. The activity undertaken by the appellant was thus a manufacturing activity. The mere fact that the manufactured goods were exempt from excise duty did not convert the same activity into a taxable service. The demand was founded on an incorrect understanding of both the Central Excise law and the service tax provisions.

Conclusion: The activity was manufacture and not Business Auxiliary Service. The service tax demand, interest, and penalties could not survive and were set aside in favour of the assessee.

Final Conclusion: The appeal succeeded and the impugned order was annulled with consequential relief.

Ratio Decidendi: An activity expressly treated by the tariff as manufacture cannot be reclassified as a taxable service merely because the resulting goods are exempt from excise duty.

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