Manufacture of heavy water defeats service tax, and a later notice was time-barred where facts were already known.

Operating a heavy water plant and producing heavy water was treated as manufacture because the process yielded a distinct excisable product with a separate name, character and use under Section 2(f) of the Central Excise Act, even though the product attracted nil duty under Chapter 28.45. Service tax could not be levied on the same manufacturing activity merely by classifying it under the proposed service categories. A later show cause notice invoking the extended period under Section 73 of the Finance Act, 1994 was also held time-barred because an earlier notice on the same facts had already put the department on notice. The demand therefore failed on both merits and limitation.

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Issues: (i) Whether the activity of operating the heavy water plant and producing heavy water amounted to manufacture of excisable goods and could be subjected to service tax under the alleged taxable categories. (ii) Whether the second show cause notice invoking the extended period of limitation was barred by time.

Issue (i): Whether the activity of operating the heavy water plant and producing heavy water amounted to manufacture of excisable goods and could be subjected to service tax under the alleged taxable categories.

Analysis: The activity was found to be the operation of a plant for generation of heavy water, with the main consideration linked to the quantity of heavy water supplied. The process resulted in a distinct product with a separate name, character and use, attracting the statutory concept of manufacture under Section 2(f) of the Central Excise Act, 1944. Heavy water was treated as excisable goods even though it attracted nil rate of duty under Chapter 28.45 of the Central Excise Tariff Act, 1985. Since the activity was found to be manufacturing activity and the ancillary functions were incidental to it, service tax could not be levied on the same activity under the proposed service categories.

Conclusion: The issue was decided in favour of the assessee; the activity was held to be manufacturing activity and not liable to service tax on that basis.

Issue (ii): Whether the second show cause notice invoking the extended period of limitation was barred by time.

Analysis: The record showed that an earlier show cause notice had already been issued on the same set of facts. The department was therefore aware of the nature of the activity when it issued the later notice. In these circumstances, invocation of the extended period under Section 73 of the Finance Act, 1994 was not justified, and the later notice was treated as time-barred.

Conclusion: The issue was decided in favour of the assessee; the second show cause notice was held to be barred by limitation.

Final Conclusion: The impugned adjudication was set aside and the appeals succeeded, as the demand failed both on the nature of the activity and on limitation.

Ratio Decidendi: Where the activity results in manufacture of excisable goods, service tax cannot be imposed on the same activity merely because the finished product attracts nil duty, and the extended period of limitation cannot be invoked when the department was already aware of the same facts from an earlier notice.

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