Service tax on contract manufacturing was upheld as a distinct service aspect within Parliament's residuary legislative competence.

Service tax on contract manufacturing of alcoholic liquor for human consumption was upheld as constitutionally valid because the levy targeted the service element in job-work or outsourced manufacture, not manufacture per se. Applying pith and substance and the aspect doctrine, the Court treated manufacture for oneself and manufacture for another as legally distinct, holding that the latter is a taxable service within Parliament's residuary competence under Entry 97 of List I, while State excise power under Entry 51 of List II remained intact. The challenge to the amendments and to the notification commencing them from 1 June 2015 was rejected, and the commencement notification was upheld.

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Issues: Whether the impugned levy of service tax on contract manufacturing of alcoholic liquor for human consumption under the amended Finance Act, 1994 and Finance Act, 2015 was constitutionally valid and within Parliament's legislative competence; and whether the notification bringing the amendment into force from 1 June 2015 was valid.

Analysis: The challenge was examined on the touchstone of the constitutional division of taxing powers. Entry 51 of List II covers excise on manufacture of alcoholic liquor for human consumption, while Entry 97 of List I supports Parliament's residuary power where the subject is not covered by List II or List III. Applying the doctrine of pith and substance, the decisive question was whether the levy was on manufacture per se or on the service element involved when one person manufactures liquor for another on job-work or contract-manufacturing basis. The Court held that manufacture for oneself and manufacture for another are distinct. The latter constitutes an activity rendered for consideration by one person for another and falls within the statutory definition of service. The aspect doctrine also supported the levy because the same transaction may have separate taxable aspects, namely manufacture for State excise and outsourced service for service tax. The challenge to the pre-2015 amendment and to the 2015 amendment was therefore rejected, and the notification appointing 1 June 2015 as the commencement date was upheld. The challenge to the show cause notice was not adjudicated on merits and was left open for the statutory adjudication process.

Conclusion: The levy of service tax on contract manufacturing of alcoholic liquor for human consumption was upheld as constitutionally valid and within Parliament's competence; the notification commencing the amendment from 1 June 2015 was also upheld.

Ratio Decidendi: Service tax can validly be imposed on the service aspect of contract manufacturing or job work undertaken by one person for another, even where the underlying goods are alcoholic liquor for human consumption within the State's excise domain, because the two aspects are legally distinct and the service aspect falls within Parliament's residuary legislative competence.

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