2025 (8) TMI 1296 - AT - Service Tax

Charges to contractor for exclusive electricity supply held part of 'manufacture' under Section 2(f), no service tax

M/s. Haldia Petrochemicals Limited Versus Commissioner of Central Tax, Kolkata

CESTAT KOLKATA - AT held that charges paid to a contractor for generating electricity exclusively for a manufacturer did not attract service tax as ... Levy of service tax on the facilitation charges received - HPLCL has generated electricity on behalf of HPL - said processing/job work amounts to manufacture as per Section 2(f) of the Central Excise Act or constitutes Business Auxiliary services - interest and penalty - extended period of limitation - HELD THAT:- In the present case, it is found that in terms of the Power Purchase Agreement dated 10th June 1998, HPL was to supply Naphtha and other utilities as free issue to HPLCL, which would be converted by HPLCL to generate electricity/steam in its power plant and supply it to HPL for exclusive use in its manufacturing facility. HPLCL received “facilitation charges” for the work done. In the impugned order service tax has been demanded from HPLCL, under the category of 'Business Auxiliary Service' on the ground that the electricity generated by them on behalf of HPL does not amount to 'manufacture' as per Section 2(f) of the Central Excise Act as electricity was not covered under the Central Excise Tariff during the relevant period. The requirement of the manufactured goods/resultant goods to be ‘excisable’ was made effective only from 01.09.2009. Prior to this date, no such requirement existed. Thus, during the relevant period under dispute, 'electricity' manufactured by the appellant was 'goods' as defined under Section 2(f) of the Central Excise Act, 1994. The activity of 'manufacture' has been specifically excluded from the definition of 'Business Auxiliary Service'. Thus, the generation of electricity being manufacture of goods, cannot be chargeable to service tax under the category of 'Business Auxiliary Service' - In the instant case, HPLCL produced power exclusively for supply to HPL only. Since, only two parties were involved in the said transaction, HPLCL cannot be said to have undertaken job work “on behalf of” Appellant. Thus, the facilitation charges paid by Appellant shall not be exigible to service tax, as generation of electricity by HPLCL for use by the Appellant was not covered under the definition of Business Auxiliary Service during the impugned period - the demand confirmed in the impugned order is legally not sustainable and is set aside. Interest and penalty - HELD THAT:- As the demand itself is not sustainable, the question of demanding interest or imposing penalties does not arise. Extended period of limitation - HELD THAT:- HPL had apprised the Departmental authorities about the production process of the Combined Cycle Cogeneration Power Plant. Hence, it is observed that the Department was all along aware of the arrangement between HPLCL and HPL. Thus, the demand cannot be confirmed by invoking extended period of limitation. The impugned order is set aside - appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether generation/production of electricity by a third-party power plant for exclusive use of a manufacturer amounts to 'manufacture' under Section 2(f) of the Central Excise Act for the period under dispute. 2. Whether facilitation/consideration paid to the power plant is exigible to service tax under the category 'Business Auxiliary Service' (BAS) for the period under dispute, including the legal effect of Clause (v) of Section 65(19) of the Finance Act before and after its amendment w.e.f. 16.06.2005. 3. Whether the requirement that the resultant/manufactured goods be 'excisable' is a pre-requisite for denial of BAS treatment during the relevant period, having regard to the amendment effective 01.09.2009. 4. Whether extended period of limitation could be invoked where the Department had prior knowledge of the arrangement and production process. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Whether generation of electricity is 'manufacture' under Section 2(f) Legal framework: Definition of 'manufacture' in Section 2(f) of the Central Excise Act; exclusion of activities amounting to 'manufacture' from BAS; concept of 'goods' including electricity for the relevant period (prior to 01.09.2009). Precedent treatment: Tribunal decisions (including CMS (I) Operations & Maintenance Co. P. Ltd. and subsequent Tribunal decisions) and High Court authorities have consistently held that electricity is a manufactured product and falls within the scope of Clause (f) of Section 2. Interpretation and reasoning: The Tribunal applied the inclusive definition of manufacture and relied on settled precedent that generation/production of electricity constitutes manufacture. The Court observed no contrary higher-court authority and followed the established ratio that electricity is 'goods' manufactured within Section 2(f) for the relevant period. Ratio vs. Obiter: The holding that generation of electricity amounts to 'manufacture' is ratio decidendi as it determines whether BAS can apply. Conclusion: Generation/production of electricity by the power plant for the appellant constitutes 'manufacture' under Section 2(f) for the period under dispute; such activity is excluded from BAS and therefore not exigible to service tax under that head. Issue 2 - Applicability of Business Auxiliary Service and effect of Clause (v) of Section 65(19) (pre- and post-16.06.2005) Legal framework: Definition of 'business auxiliary service' under Section 65(19), particularly sub-clause (v) (production of goods on behalf of the client) and its post-amendment wording (production or processing of goods for, or on behalf of, the client) w.e.f. 16.06.2005; Notification/exemptions (e.g., Notification No. 8/2005) and Board circulars clarifying scope. Precedent treatment: Tribunal decisions (Auto Coats, Sonic Watches, Ferro Scrap Nigam, Vardhaman Axles & Wheels) and Board circulars established that prior to the June 2005 amendment the expression required production 'on behalf of the client' (implying a three-party relationship) and did not cover mere two-party production/processing; post-amendment inclusions were prospective and subject to other conditions/exemptions. Interpretation and reasoning: For the period before 16.06.2005 the Court analysed Clause (v) as requiring production 'on behalf of' the client which, in established jurisprudence, implies involvement of three parties (service provider, client, and the client's customer). Where the service provider produces goods exclusively for the client (two parties), that activity does not fall within BAS. The Court also treated the June 2005 amendment as prospective and not retrospective; for the period after 16.06.2005, relevant exemption notifications and conditions (use of client-supplied inputs, return to client for use in dutiable manufacture) were considered where applicable in prior decisions favoring the assessee. Ratio vs. Obiter: The conclusions that (a) pre-16.06.2005 BAS requires a three-party nexus and (b) two-party exclusive supply is not BAS are ratio and determinative of tax liability; observations about the prospective nature of the amendment and application of Notification No. 8/2005 are also ratio where applied to relevant periods. Conclusion: The facilitation charges paid for electricity generated exclusively for the client do not constitute BAS for the period under dispute because (i) generation is 'manufacture' (see Issue 1) and (ii) prior to the June 2005 amendment the BAS provision required production 'on behalf of' the client (three-party relationship) which is absent. Even post-amendment, available exemption jurisprudence and conditions further support non-liability where applicable. Issue 3 - Requirement of resultant goods being 'excisable' (effect of amendment effective 01.09.2009) Legal framework: Amendment making the manufactured/resultant goods required to be 'excisable' effective from 01.09.2009; temporal operation of statutory amendments and their relevance to earlier periods. Precedent treatment: The Court and preceding tribunals have noted that the excisability requirement was introduced only from 01.09.2009 and does not affect earlier periods; prior to that date there was no prerequisite that the manufactured goods be excisable for Section 2(f) to apply. Interpretation and reasoning: The Tribunal observed that during the period under dispute no condition requiring the manufactured goods to be excisable existed; therefore electricity qualified as 'goods' and manufacture under Section 2(f) irrespective of its presence or absence in the Central Excise Tariff at that time. Ratio vs. Obiter: The statement that excisability requirement is inapplicable prior to 01.09.2009 is ratio when determining liability for the period under dispute. Conclusion: Absence of electricity from the Central Excise Tariff during the relevant period did not preclude it from being 'manufacture' under Section 2(f); the excisability requirement introduced later is not retrospectively applicable. Issue 4 - Invoking extended period of limitation where Department had prior knowledge Legal framework: Section governing limitation and extended period for service tax recovery; principle that extended period cannot be invoked for suppression where facts were within departmental knowledge. Precedent treatment: Jurisprudence establishes that where the Department was aware of material facts (e.g., through earlier communications), invoking extended limitation is impermissible. Interpretation and reasoning: The Court noted documentary evidence (letter dated 15.12.2000) brought arrangements to the Department's attention and concluded the Department knew of the production process and contractual arrangement. Given that knowledge, extended period for demand cannot be sustained. Ratio vs. Obiter: The holding that extended period is barred where authorities had prior knowledge is ratio as applied to the facts. Conclusion: Extended period of limitation could not be invoked; the demand is time-barred insofar as it relied on extended limitation given the Department's prior knowledge of the arrangement. Overall Conclusion In view of (a) generation of electricity constituting 'manufacture' under Section 2(f) for the period under dispute, (b) the pre-16.06.2005 scope of BAS requiring a three-party relationship which is absent, (c) the excisability requirement being inapplicable prior to 01.09.2009, and (d) the Department's prior knowledge precluding extended limitation, the demand of service tax, interest and penalties confirmed in the impugned order was held unsustainable and set aside. The question of interest and penalties did not survive once the primary demand was held invalid.