Manufacture versus business auxiliary service: processing raw milk into toned milk escaped service tax as a distinct marketable product.

Chilling, pasteurization, homogenization and standardization of raw milk into toned milk were treated as manufacture because the process produced a marketable product that was distinct from the raw material by name, use and characteristics. Chapter Note 6 to Chapter 4 operated as a deeming provision where treatment renders the product marketable to consumers, and the activity therefore fell within manufacture rather than business auxiliary service. As manufacture is excluded from the scope of business auxiliary service, the service tax demand and penalties could not be sustained. The limitation plea was not examined because the matter was decided on merits.

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Issues: Whether the processes of chilling, pasteurization, homogenization and standardization of raw milk into toned milk amounted to manufacture so as to fall outside the scope of business auxiliary service and consequently escape service tax liability.

Analysis: The processes undertaken transformed raw milk into toned milk, which was treated as a marketable product under Chapter Note 6 of Chapter 4. The note operates as a deeming provision where treatment renders the product marketable to consumers. The final product was held to be distinct from the raw material by name, use and characteristics, and the business auxiliary service definition itself excludes activities amounting to manufacture. Since the conversion resulted in a manufactured excisable product, the activity could not be taxed as business auxiliary service. The plea on limitation was not examined because the appeal succeeded on merits.

Conclusion: The activity amounted to manufacture and not business auxiliary service; the service tax demand and penalties could not be sustained.

Ratio Decidendi: Where processing of goods results in a marketable and commercially distinct product and is treated as manufacture by the applicable deeming provision, the activity falls outside the ambit of business auxiliary service.

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