Manufacture exclusion from business auxiliary service applies when processing is treated as manufacture under excise law.

Pasteurization and packing of milk into branded consumer packs were treated as manufacture because Chapter Note 6 to Chapter 4 deems labelling, repacking, and other treatment making goods marketable to be manufacture under Section 2(f) of the Central Excise Act, 1944. As the activity fell within manufacture, it was excluded from the business auxiliary service entry under Section 65(19) of the Finance Act, 1994, which expressly excludes processes amounting to manufacture. The text states that service tax was therefore not payable under business auxiliary service and the Revenue challenge failed.

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Issues: (i) Whether the activities undertaken under the tripartite arrangement amounted to manufacture; (ii) Whether the activity was excluded from levy of service tax under the business auxiliary service entry.

Issue (i): Whether the activities undertaken under the tripartite arrangement amounted to manufacture.

Analysis: Chapter Note 6 to Chapter 4 of the Central Excise Tariff Act, 1985 treats labeling or relabeling of containers, repacking from bulk packs to retail packs, and any other treatment to render the product marketable as manufacture. The activities of pasteurization and packing of milk into branded consumer packs fell within that wide statutory definition and were covered by the meaning of manufacture under Section 2(f) of the Central Excise Act, 1944.

Conclusion: The activities amounted to manufacture.

Issue (ii): Whether the activity was excluded from levy of service tax under the business auxiliary service entry.

Analysis: Section 65(19) of the Finance Act, 1994 covers production or processing of goods for or on behalf of a client, but expressly excludes activities amounting to manufacture within the meaning of Section 2(f) of the Central Excise Act, 1944. Since the impugned activity was held to be manufacture, it could not be taxed as business auxiliary service.

Conclusion: The activity was not liable to service tax under business auxiliary service.

Final Conclusion: The Revenue's challenge failed and the order dropping service tax liability was sustained.

Ratio Decidendi: Where a process is specifically treated as manufacture by the applicable chapter note, the resulting activity falls outside the service tax entry for business auxiliary service because the statutory exclusion for manufacture applies.

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