2023 (8) TMI 854 - AT - Service Tax

Loan licensee not liable for service tax under business auxiliary service for drug manufacturing. Tribunal sets aside demand.

The Tribunal held that the appellant, engaged in manufacturing drugs as a loan licensee, was not liable to pay service tax under the category of business ... Levy of Service tax - business auxiliary service - tax on the gross amount received by the appellant for manufacture and supply of the drugs - drugs manufactured by the appellant are exempted from payment of central excise duty - HELD THAT:- From the facts stated in the show cause notice it is not under dispute that the activity of manufacturing of drugs on behalf of the principle is an excisable activity in terms of Section 2 (f) of Central Excise Act, 1944. The demand was confirmed on the very same activity under the category of Business Auxiliary Service and sub head “production of goods on behalf of the clients”. It can be seen that in clause (v) of the definition of Business Auxiliary Service, though the production of goods on behalf of the client is a taxable service, however, any activity that amounts to manufacture within the meaning of clause (f) of Section 2 of the Central Excise Act, 1944 is out of the ambit of the definition of Business Auxiliary Service. The Revenue has completely misunderstood the definition of business auxiliary service particularly with regard to the service of production of goods on behalf of the client. From the definition it is absolutely clear that all such production activities which are other than the activity of manufacture in terms of Section 2 (f) of Central Excise Act, 1944 are alone shall be taxable activity under the head of production of goods on behalf of the client under Business Auxiliary Service. Therefore, in the present case the activity admittedly amounts to manufacture of excisable goods i.e., drugs which is clearly covered under Section 2 (f) of Central Excise Act, 1944 cannot be classified as taxable service under business auxiliary service. The Revenue while demanding the service tax also taken the support from the exemption Notification No. 08/2005-ST contending that since the appellant’s manufacturing activity is exempted from excise duty, the exemption Notification No. 08/2005- ST is also not available - here the activity does not fall under the definition of business auxiliary service since the same is excisable manufacturing activity in terms of Section 2 (f) of Central Excise Act, 1944 the Notification 08/2005 – ST is absolutely irrelevant in the present case. It is noteworthy that the said notification is only relevant when the service is taxable under Finance Act, 1994 which is not the case here as per discussion. The demand of service tax is not sustainable. Accordingly, the impugned order is set aside. Appeal is allowed. Issues involved:The issue involves liability to pay service tax under the category of business auxiliary service on the gross amount received for the manufacture and supply of drugs that are exempt from central excise duty.Summary:The appellant, engaged in manufacturing drugs as a loan licensee, was held liable to pay service tax under the category of business auxiliary service. The appellant contended that the manufacturing activity is excluded from the definition of Business Auxiliary Service as it falls under excisable goods manufacturing. The Tribunal found that the activity of manufacturing drugs on behalf of the principal is an excisable activity and not taxable under business auxiliary service. The Revenue's reliance on exemption Notification No. 08/2005-ST was deemed irrelevant as the activity did not fall under the definition of business auxiliary service. The Tribunal set aside the demand of service tax, allowing the appeal with consequential relief.The Tribunal analyzed the definition of Business Auxiliary Service under the Finance Act, 1994, highlighting that production of goods on behalf of the client is taxable unless it amounts to 'manufacture' as per Section 2 (f) of the Central Excise Act, 1944. The Tribunal concluded that the manufacturing activity of drugs, falling under Section 2 (f), cannot be classified as a taxable service under business auxiliary service.The Tribunal noted that the demand for service tax was based on the incorrect understanding of the definition of business auxiliary service, particularly regarding the production of goods on behalf of the client. It clarified that all production activities other than those amounting to manufacture under Section 2 (f) of the Central Excise Act, 1944, would be taxable under business auxiliary service. The Tribunal emphasized that the exemption Notification No. 08/2005-ST was irrelevant since the activity did not fall under the definition of business auxiliary service.In conclusion, the Tribunal found the demand for service tax unsustainable, setting aside the impugned order and allowing the appeal with any consequential relief in accordance with the law. The decision was pronounced in open court on 17.08.2023.