Processing not amounting to manufacture attracts Business Auxiliary Services tax, while goods sold must be excluded from taxable value.

Powder coating of furniture, panel boards and other metallic items on a job-work basis was treated as processing that did not amount to manufacture, so the activity remained liable to service tax under Business Auxiliary Services after the 16.6.2005 amendment covering production or processing for clients where manufacture is absent. For recomputation, the value of goods and materials sold to customers had to be excluded under Notification No. 29/2007, subject to verification of the admissible exclusion. Penalty was held unwarranted because the dispute turned on interpretation of law, and fresh quantification was directed on that basis.

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Issues: (i) Whether powder coating of furniture, panel boards and other metallic items on job work basis amounted to manufacture or was liable to service tax under the head of Business Auxiliary Services. (ii) Whether the value of goods and materials sold to customers was deductible for service tax computation and whether penalty could be sustained.

Issue (i): Whether powder coating of furniture, panel boards and other metallic items on job work basis amounted to manufacture or was liable to service tax under the head of Business Auxiliary Services.

Analysis: The activity of powder coating was treated as a processing activity which did not result in manufacture. Since the process did not amount to manufacture, it fell within the service tax net under Business Auxiliary Services as amended with effect from 16.6.2005 for production or processing of goods for and on behalf of clients where such process does not amount to manufacture.

Conclusion: The process was not manufacture and the appellants were liable to service tax under Business Auxiliary Services.

Issue (ii): Whether the value of goods and materials sold to customers was deductible for service tax computation and whether penalty could be sustained.

Analysis: Notification No. 29/2007 dated 22.5.2007 was relied on for exclusion of the value of goods and materials sold to customers from the taxable value. The matter involved interpretation of law, and on that footing the penalty was held unwarranted. The matter was therefore remanded for fresh quantification after giving credit for the admissible exclusion and after verification of the value of goods sold.

Conclusion: The value of goods and materials sold was to be excluded in recomputing tax, and the penalty was not sustainable.

Final Conclusion: The demand was upheld only on the question of taxability of the processing activity, but the matter was sent back for fresh computation with the admissible exclusion and without penalty.

Ratio Decidendi: A processing activity that does not amount to manufacture may be taxed as Business Auxiliary Services, but the taxable value must exclude the value of goods and materials sold where the governing notification so permits.

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