Captive power generation as manufacture excluded from Business Auxiliary Service; retrospective tax expansion and extended limitation both failed.

Generation of electricity for captive use was treated as manufacture because electricity is goods for section 2(f) of the Central Excise Act, so the activity fell outside Business Auxiliary Service. The pre-16.06.2005 and post-16.06.2005 wording of the Business Auxiliary Service definition did not sustain tax on the arrangement, because the later expansion of taxable language was prospective and the two-party setup did not amount to production on behalf of a client in the taxable sense. The demand was also barred by limitation, as the Department already knew the facts and extended-period suppression was not justified. Service tax, interest, and penalties were therefore unsustainable.

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Issues: (i) Whether generation of electricity by the power plant for captive use constituted manufacture and, therefore, fell outside the taxable scope of Business Auxiliary Service; (ii) whether the pre-16.06.2005 and post-16.06.2005 language of the Business Auxiliary Service definition could fasten service tax liability on the arrangement; (iii) whether the demand was barred by limitation.

Issue (i): Whether generation of electricity by the power plant for captive use constituted manufacture and, therefore, fell outside the taxable scope of Business Auxiliary Service.

Analysis: The activity was examined as one of generation of electricity/steam under the contractual arrangement for captive use in the manufacturing facility. Electricity was treated as goods for the purpose of Section 2(f) of the Central Excise Act, 1944, and the activity of generating it was held to amount to manufacture. Since manufacture is expressly excluded from Business Auxiliary Service, the activity could not be brought to tax under that head.

Conclusion: The activity was not exigible to service tax under Business Auxiliary Service and this issue was decided in favour of the assessee.

Issue (ii): Whether the pre-16.06.2005 and post-16.06.2005 language of the Business Auxiliary Service definition could fasten service tax liability on the arrangement.

Analysis: For the relevant period prior to 16.06.2005, the statutory phrase covered production of goods on behalf of the client, and the later inclusion of production or processing of goods for, or on behalf of, the client was treated as a prospective expansion. The arrangement involved only two parties and did not satisfy the requirement of production on behalf of a client in the taxable sense. The amended wording was held not to operate retrospectively against the assessee.

Conclusion: The service tax demand could not be sustained on the basis of the pre-amendment or amended wording, and this issue was decided in favour of the assessee.

Issue (iii): Whether the demand was barred by limitation.

Analysis: The Department had been informed of the arrangement much earlier, including the power-generation setup and its operational manner. In these circumstances, invocation of the extended period on the basis of suppression was not justified.

Conclusion: The demand was time-barred by limitation and this issue was decided in favour of the assessee.

Final Conclusion: The service tax demand, interest, and penalties were not sustainable, and the assessee obtained complete relief.

Ratio Decidendi: Generation of electricity as an activity amounting to manufacture falls outside Business Auxiliary Service, and a later widening of the taxable definition cannot be applied retrospectively to sustain a demand where the Department already knew the relevant facts.

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