2025 (1) TMI 1444 - AT - Service Tax

Fixed cost reimbursement during manufacturing activity not subject to service tax levy under job-work arrangements

CESTAT Ahmedabad allowed the appeal regarding service tax levy on reimbursement of fixed costs. The tribunal held that charging fixed and variable costs ... Service or not - reimbursement of fixed costs by the appellant to refrain from utilizing their plant and machinery for other parties - levy of service tax - HELD THAT:- Learned Commissioner (Appeal) while adjudicating the matter has not considered various legal pronouncements on this issue. The matter is no longer res-integra, as the matter has already been decided by this Tribunal in case of the appellant in case of Commissioner of Central Excise & Service Tax, Anand Vs. Standard Pesticides Pvt. Limited [2024 (3) TMI 1043 - CESTAT AHMEDABAD] where it was held that 'The fact that appellant (earlier known as PMSL) was charging two components towards job-charges separated as fixed cost and variable cost cannot alter this situation so long as goods were manufactured. In a situation where goods were not manufactured but charges were collected under the fixed component it could have been considered as a service. While working out cost of any manufactured product costing is done by splitting cost elements into fixed cost and variable cost and that cannot change the nature of the activity. What could have changed the nature of the activity is a situation where no manufacturing activity took place and still the appellant collected their charges.' There is no merit in the impugned order-in-appeal - Appeal allowed. ISSUES PRESENTED and CONSIDEREDThe core legal issue in this judgment revolves around whether the reimbursement of fixed costs by the appellant to refrain from utilizing their plant and machinery for other parties constitutes a 'service' under Section 66E(e) of the Finance Act, 1994, thereby attracting service tax liability. The Tribunal had to consider if the activities under the 'Loan License Agreement' could be classified as a declared service or if they were integral to the job work manufacturing process, exempt from service tax.ISSUE-WISE DETAILED ANALYSISRelevant Legal Framework and PrecedentsThe primary legal framework involves the interpretation of Section 66E(e) of the Finance Act, 1994, which deals with declared services. The Tribunal also considered Section 66F, which provides guidelines for determining the taxability of bundled services. Relevant precedents include prior Tribunal decisions such as the case of Commissioner of Central Excise & Service Tax, Anand vs. Standard Pesticides Pvt. Limited and others like Brindavan Bottlers Pvt. Limited vs. CCE&ST, Lucknow, which dealt with similar issues of job work and service tax liability.Court's Interpretation and ReasoningThe Tribunal found that the Learned Commissioner (Appeal) had erred by not considering established legal pronouncements and precedents. The Tribunal emphasized that the agreement between the appellant and their principal manufacturer primarily constituted a job work manufacturing agreement. The fixed cost reimbursement was seen as an integral part of the job work charges, aimed at maintaining confidentiality and exclusive use of plant and machinery for the principal manufacturer, rather than a separate service.Key Evidence and FindingsThe Tribunal reviewed the manufacturing agreement clauses, which highlighted the non-exclusive nature of the arrangement and the confidentiality obligations. It was noted that the fixed charges were essential for maintaining the proprietary interest and confidentiality of the principal manufacturer, and were not independent of the manufacturing activity.Application of Law to FactsThe Tribunal applied the legal principles from Section 66F to determine that the fixed charges were not a declared service under Section 66E(e). The charges were directly related to the job work and manufacturing process, and thus, did not warrant separate service tax liability. The Tribunal also referenced previous decisions to support the view that manufacturing agreements with fixed and variable cost components should not be split for service tax purposes.Treatment of Competing ArgumentsThe Tribunal dismissed the department's argument that the fixed cost reimbursement constituted a separate service. It highlighted that the department failed to establish that the fixed charges were independent of the manufacturing activity. The Tribunal also refuted the applicability of Section 66F in this context, as there was no dispute regarding service classification or bundling.ConclusionsThe Tribunal concluded that the fixed cost reimbursement was part of the job work manufacturing agreement and not a declared service. Therefore, the service tax demand was not sustainable under the Finance Act, 1994.SIGNIFICANT HOLDINGSThe Tribunal's significant holding was that the fixed cost reimbursement did not fall under the declared service category as per Section 66E(e) of the Finance Act, 1994. The Tribunal emphasized the importance of considering the agreement in its entirety and recognized that the fixed and variable cost components were integral to the job work manufacturing process.Core Principles EstablishedThe judgment reinforced the principle that job work manufacturing agreements involving fixed and variable costs should be viewed in their entirety for service tax purposes. It established that confidentiality and exclusive use obligations within such agreements do not constitute separate services under declared service provisions.Final Determinations on Each IssueThe Tribunal set aside the impugned order-in-appeal, thereby allowing the appeal and dismissing the cross-objection. The decision underscored that the fixed cost reimbursement was not subject to service tax as a declared service, aligning with previous Tribunal decisions on similar matters.