Tribunal upholds taxability of contract bottling under Business Auxiliary Service, sets aside penalty under Section 78

The Tribunal rejected the appellant's argument that the second show cause notice (SCN) was time-barred, upheld the taxability of contract bottling under Business Auxiliary Service (BAS), denied exemption under Notification No.39/2009-ST due to availing CENVAT credit, allowed eligibility for exemption upon reversing CENVAT credit and paying interest, and set aside penalty under Section 78 while upholding penalty under Section 77 of the Finance Act, 1994. The appellant must reverse CENVAT credit, pay interest, and the matter was remanded for reworking service tax liability.

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Issues Involved:
1. Limitation period for issuing the second show cause notice (SCN).
2. Taxability of contract bottling under Business Auxiliary Service (BAS).
3. Eligibility for exemption under Notification No.39/2009-ST.
4. Reversal of CENVAT credit and its impact on eligibility for exemption.
5. Imposition of penalties under Sections 76, 77, and 78 of the Finance Act, 1994.

Detailed Analysis:

1. Limitation Period for Issuing the Second SCN:
The appellant argued that the second SCN issued on 29.01.2015 was barred by limitation because the first SCN on a related issue was issued on 10.10.2014. The Tribunal examined the letter dated 05.12.2013, which conveyed various audit objections, including the issues in both SCNs. It was found that the objections were distinct and not intrinsically related. The first SCN addressed the wrong availment of CENVAT credit based on a debit note, while the second SCN concerned non-compliance with conditions for exemption under Notification No.39/2009-ST. The Tribunal concluded that the second SCN was not barred by limitation and rejected the appellant's contention.

2. Taxability of Contract Bottling under BAS:
The appellant contended that the manufacture of alcoholic liquor for human consumption falls under the purview of the State Government and should not attract service tax. However, the Tribunal noted that the High Court of Delhi had confirmed the taxability of contract bottling under BAS in the Carlsberg India case, and the Supreme Court had only admitted the appeal without granting a stay on taxability. Therefore, the Tribunal upheld the taxability of contract bottling under BAS.

3. Eligibility for Exemption under Notification No.39/2009-ST:
The appellant claimed exemption under Notification No.39/2009-ST, which allows exclusion of the value of inputs from the taxable value provided no CENVAT credit is taken on those inputs. The Tribunal found that the appellant had availed CENVAT credit on inputs and capital goods, thereby failing to meet the conditions for exemption. The Tribunal emphasized that the exemption is conditional upon non-availment of CENVAT credit and documentary proof of input values. Since these conditions were not met, the exemption was not initially available to the appellant.

4. Reversal of CENVAT Credit and Its Impact on Eligibility for Exemption:
The appellant proposed to reverse the CENVAT credit of Rs. 1,22,93,434/- along with applicable interest, relying on the Supreme Court judgment in Chandrapur Magnet Wires and other related cases. The Tribunal agreed that subsequent reversal of CENVAT credit could make the appellant eligible for the exemption. It was held that if the appellant reverses the credit and pays the interest, they would satisfy the conditions of Notification No.39/2009-ST, and the exemption could be extended to them. The Tribunal directed the appellant to reverse the credit and pay the interest within four weeks for the adjudicating authority to rework the service tax liability accordingly.

5. Imposition of Penalties under Sections 76, 77, and 78 of the Finance Act, 1994:
The appellant argued against the imposition of penalties under Section 78 due to lack of clarity on the taxability of contract bottling and the contradictory conditions in the exemption notification. The Tribunal noted that the issue of taxability was still pending before the Supreme Court and acknowledged the appellant's willingness to pay penalties under Section 77. Given the complexities and ongoing disputes, the Tribunal found merit in the appellant's argument and set aside the penalty under Section 78, but upheld the penalty under Section 77.

Conclusion:
The Tribunal allowed the appeal on the terms that the appellant reverses the CENVAT credit and pays the applicable interest. The matter was remanded to the adjudicating authority for verification of the predeposit, interest payment, and reworking the service tax liability after extending the benefit of Notification No.39/2009-ST. The appeal was pronounced in court on 23.08.2018.

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