Footwear company affixing brand name on purchased goods ruled as trader not manufacturer under Central Excise Act

CESTAT NEW DELHI held that assessee purchasing footwear from vendors and affixing their brand name was not liable for excise duty as they were not manufacturers under Central Excise Act. The activity constituted trading, not deemed manufacture. Additionally, penalties recovered from vendors for contract breaches were not chargeable to service tax as they were not consideration for services but contractual penalty provisions. The distinction between contract conditions and consideration was emphasized. The impugned order was set aside and appeal allowed in favor of assessee.

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Issues Involved:
1. Whether the activity conducted by the assessee was chargeable to Central Excise duty.
2. Whether the penalties recovered by the assessee from the vendors were chargeable to service tax.

Comprehensive Summary:

Issue 1: Central Excise Duty Liability
The appellant, engaged in the manufacturing of readymade garments and made-up articles of textile, was found during an audit to have sold footwear items under their brand name "Fab India" without paying excise duty. The Adjudicating Authority concluded that affixing labels, MRP tags, and barcodes amounted to 'deemed manufacture' under Section 2(f)(iii) of the Central Excise Act, thus making the appellant liable to pay excise duty. However, the Tribunal observed that the entire manufacturing activity was conducted by the vendors, and the appellant was only involved in trading. Citing various decisions, including Mayo India Ltd. vs. Commissioner of C. Ex. Aurangabad and Burman Laboratories Ltd. vs. Commissioner of Central Excise, Indore, the Tribunal concluded that the appellant was not the manufacturer and hence not liable for excise duty. The Tribunal emphasized that the mere provision of raw materials and specifications does not make the appellant the manufacturer; the actual manufacturing was done by the vendors.

Issue 2: Service Tax on Penalties
The appellant had received penalties from vendors for not meeting contract terms, which the Adjudicating Authority deemed taxable under Section 66E(e) of the Finance Act, 1994, as it considered the penalties a form of consideration for tolerating a breach of contract. The Tribunal, however, referred to decisions such as South Eastern Coalfields Ltd. vs. Commissioner of Central Excise and Service Tax, Raipur, and Steel Authority of India Ltd. vs. Commissioner of GST & Central Excise, Salem, to conclude that penalties do not constitute consideration for any independent activity. The Tribunal noted that penalties are meant to safeguard commercial interests and are not intended as consideration for tolerating a breach. The Tribunal also referenced Circular No. 178/10/2022-GST, which clarified that penalties for breach of contract are not taxable as they do not constitute consideration for any service.

Conclusion:
The Tribunal set aside the demands for both excise duty and service tax, along with the consequential interest and penalties, thereby allowing the appeal. The judgment emphasized that the appellant was not the manufacturer of the goods in question and that penalties received were not taxable under service tax provisions.

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