2008 (8) TMI 72 - AT - Service Tax

Tribunal: Appellants liable for service tax, but penalty waived. Eligible for Cenvat credit. Remand for re-quantification.

PSL CORROSION CONTROL SERVICES LTD. Versus COMMR. OF C. EX. & CUS., DAMAN

The Tribunal held that the appellants were liable to pay service tax for the relevant period but required re-quantification of the demand. The appellants ... Appellant undertake the activity of Epoxy coating on steel bars supplied by clients – “production” of goods not amounting to “manufacture” hence covered under Business Auxiliary Services, hence tax is payable – revenue is already aware of impugned activities under Central Excise – therefore allegation of suppression or intent to evade tax, is not sustainable – penalty not sustainable – matter remanded for requantification of demand allowing cum-tax benefit and credit Issues Involved:1. Liability of service tax under 'Business Auxiliary Services.'2. Definition and scope of 'production' vs. 'manufacture.'3. Applicability of the amended definition of 'Business Auxiliary Services' from June 16, 2005.4. Eligibility for Cenvat credit on coating materials and input services.5. Consideration of cum-service tax value.6. Imposition of penalty under Section 78 of the Finance Act, 1994.Detailed Analysis:1. Liability of Service Tax under 'Business Auxiliary Services':The Commissioner of Daman confirmed a service tax demand of Rs. 1,04,84,650/- along with Education Cess of Rs. 2,09,693/- against the appellants for activities under 'Business Auxiliary Services' during the period from 10-9-2004 to 30-6-2005. The appellants argued that the activity of applying Fusion Bonded Epoxy Coating (FBE Coating) on steel bars did not amount to 'production of goods on behalf of clients' as defined under 'Business Auxiliary Services' because it did not result in the emergence of a new product. They contended that their relationship with customers was on a principal-to-principal basis, not principal-agent, thus not fitting the definition of 'on behalf of the client.'2. Definition and Scope of 'Production' vs. 'Manufacture':The appellants argued that their activity did not result in the production of new goods and cited previous Tribunal decisions and Supreme Court rulings to support their claim. However, the Tribunal noted that the expressions 'production' and 'manufacture' are not synonymous. The Tribunal concluded that 'production of goods' under Section 65(19) of the Finance Act, 1994, includes activities that do not necessarily result in 'manufacture' as defined under Section 2(f) of the Central Excise Act. Therefore, the activity of epoxy coating, even if not amounting to manufacture, could still be considered as production under 'Business Auxiliary Services.'3. Applicability of the Amended Definition of 'Business Auxiliary Services':The appellants argued that the definition of 'Business Auxiliary Services' was amended on 16-6-2005 to include 'production or processing of goods for, or on behalf of the client,' and that the amendment should not have retrospective effect. The Tribunal, however, held that the appellants' activities were covered under the unamended definition of 'Business Auxiliary Services' and thus the argument regarding the amendment's prospective effect did not hold.4. Eligibility for Cenvat Credit on Coating Materials and Input Services:The appellants claimed entitlement to Cenvat credit on coating materials and other input services such as banking, telephone, sales promotion, advertising, and auditing. The Tribunal agreed that the appellants were eligible for such credit but noted that the Commissioner had rejected the claim due to lack of documentary evidence. The Tribunal remanded the matter for re-quantification of the demand, allowing the appellants to produce the necessary documents to claim the Cenvat credit.5. Consideration of Cum-Service Tax Value:The appellants argued that the amount collected during the disputed period should be treated as cum-service tax value in line with Explanation 2 to Section 67 of the Finance Act, 1994. The Tribunal agreed that this benefit should be extended to the appellants, affecting the re-quantification of the demand.6. Imposition of Penalty under Section 78 of the Finance Act, 1994:The appellants contended that the penalty was unwarranted as there was no intention to evade tax and they were under a bona fide belief that their activity did not attract service tax. The Tribunal noted that the Revenue was aware of the appellant's activities and had not advised them to start paying service tax. Therefore, the Tribunal found no suppression or intent to evade tax and set aside the penalty under Section 80 of the Finance Act, 1994.Conclusion:The Tribunal held that the appellants were liable to pay service tax for the relevant period, but the demand needed re-quantification by considering Cenvat credit eligibility, cum-service tax value, and excluding services provided before 10-9-2004. The penalty was set aside due to the absence of intent to evade tax. The matter was remanded to the original adjudicating authority for re-quantification.