Manufacture in retail repacking excludes service tax; retracted statements and classification dispute also defeat extended limitation.

Packing bulk finished goods into retail packs was treated as manufacture under the Central Excise Act and the relevant tariff chapter notes, so the activity fell outside service tax liability. The demand and penalties could not be sustained because the department relied mainly on statements that were later retracted and not tested in the manner required by section 9D, while the other documentary material did not alter the legal character of the activity. The dispute was one of legal classification rather than suppression, so the extended period of limitation was not available. The service tax demand, interest, and penalties were set aside.

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Issues: (i) Whether the activity of packing bulk finished goods into retail packs amounted to manufacture and therefore fell outside the service tax net. (ii) Whether the demand and penalties could be sustained on the basis of untested and retracted statements and the other documentary material relied upon by the department. (iii) Whether the extended period of limitation was invocable.

Issue (i): Whether the activity of packing bulk finished goods into retail packs amounted to manufacture and therefore fell outside the service tax net.

Analysis: The goods were manufactured products falling under Chapters 30 and 33 of the Central Excise Tariff Act, 1985. The relevant chapter notes, together with section 2(f) of the Central Excise Act, 1944, treated packaging of finished goods from bulk into retail packs as manufacture. Once the activity itself amounted to manufacture, it could not be treated as a taxable service under the service tax provisions, including the negative list framework.

Conclusion: The activity was manufacture and no service tax was payable on it.

Issue (ii): Whether the demand and penalties could be sustained on the basis of untested and retracted statements and the other documentary material relied upon by the department.

Analysis: The principal demand was founded on statements recorded during investigation. Those statements were later retracted and were not tested in the manner required by section 9D of the Central Excise Act, 1944. The other relied-upon materials, such as wage calculations, profit and loss entries, GST registration, and trade licences, were held to be insufficient to change the legal character of the activity when the underlying work was manufacture. In the absence of a valid evidentiary basis, the demand and connected penalties could not survive.

Conclusion: The demand and penalties were unsustainable.

Issue (iii): Whether the extended period of limitation was invocable.

Analysis: Since the activity itself was held to be manufacture, the dispute was one of legal classification and not suppression of facts. The case was therefore treated as involving interpretation of law, and the extended period could not be applied.

Conclusion: The extended period of limitation was not invocable.

Final Conclusion: The service tax demand, interest, and penalties were set aside, and the appeals succeeded with consequential relief.

Ratio Decidendi: Where the activity in question is statutorily treated as manufacture, it falls outside service tax liability, and demands resting on untested retracted statements cannot be sustained; in such a classification dispute, the extended period of limitation is not available absent suppression.

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