Vendor-made footwear and contractual penalty recoveries: no excise liability as manufacturer, and no service tax for tolerating breach.

Affixing labels, tags and barcodes on footwear supplied by vendors did not make the brand owner the manufacturer for central excise purposes, because the vendors carried out the production activity and the appellant's role was limited to trading, specifications and brand instructions; excise duty could not be fastened on the appellant as a deemed manufacturer. Amounts recovered from vendors as contractual penalties for breach were not consideration for tolerating an act, because the clauses operated as performance safeguards and compensation for non-performance, not as payment for any independent service; service tax was therefore not attracted. The related interest and penalty consequently could not stand.

---

---

Issues: (i) Whether affixing labels, tags and barcodes on footwear supplied by vendors amounted to manufacture making the appellant liable to central excise duty. (ii) Whether amounts recovered from vendors as penalty for breach of contract were liable to service tax as consideration for tolerating an act.

Issue (i): Whether affixing labels, tags and barcodes on footwear supplied by vendors amounted to manufacture making the appellant liable to central excise duty.

Analysis: Excise duty is attracted on manufacture, and liability ordinarily rests on the person who actually carries out the manufacturing activity. The agreement and surrounding facts showed that the vendors undertook the production activity, while the appellant's role was confined to trading and to supplying specifications, brand-related materials and instructions. Mere supply of labels, tags or barcodes, or insistence on compliance with specifications, did not convert the appellant into the manufacturer. The activity did not satisfy the basis for fastening duty on the appellant as a deemed manufacturer.

Conclusion: The appellant was not liable to central excise duty on the footing of manufacture.

Issue (ii): Whether amounts recovered from vendors as penalty for breach of contract were liable to service tax as consideration for tolerating an act.

Analysis: Service tax under the declared service entry required a nexus between the amount received and a taxable service, including an agreement to tolerate an act for consideration. The penalty clauses in the vendor contracts were safeguards to secure performance and compensate breach, not consideration for any independent service. Recovery of penalty or liquidated damages for non-performance did not amount to a taxable service, and the amounts had no requisite nexus with any service provided by the appellant.

Conclusion: The penalty amounts recovered from vendors were not liable to service tax.

Final Conclusion: The demand for both central excise duty and service tax failed, and the consequential interest and penalty also could not stand.

Ratio Decidendi: A principal or brand owner is not the manufacturer merely because goods are produced by vendors to its specifications, and contractual penalty or liquidated damages recovered for breach of contract is not consideration for tolerating an act unless there is a direct nexus with a taxable service.

---