Business Auxiliary Services on job-work powder coating: taxable base excludes goods sold, and penalty cannot stand on legal interpretation.

Powder coating on metallic items supplied by customers was treated as processing, not manufacture, and was considered taxable under Business Auxiliary Services after the relevant amendment. The value of goods and materials sold to customers had to be excluded from the taxable base under the notification relied upon, requiring recomputation of the tax liability after verification of such value. As the dispute turned on interpretation of law, the penalty was not sustainable.

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Issues: Whether powder coating undertaken on job work basis was liable to service tax under Business Auxiliary Services, and whether the value of goods and materials sold to customers was deductible while computing tax liability.

Analysis: The activity of powder coating on metallic items supplied by customers was treated as processing that did not amount to manufacture, and therefore fell within the taxable category of Business Auxiliary Services after the relevant amendment. At the same time, the notification relied upon by the appellant provided for exclusion of the value of goods and materials sold to the customer, so that such value had to be excluded from the taxable base. Since the dispute involved interpretation of law, the penalty could not be sustained. The matter required recomputation of tax liability after verification of the value of goods sold and application of the notification.

Conclusion: The demand was not set aside in full, but the tax liability was directed to be recalculated after deducting the value of goods and materials sold to customers, and the penalty was unsustainable.

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