Manufacture versus taxable service: embroidery job work was treated as manufacture, defeating service tax and penalty.

Embroidery work undertaken on a job-work basis was treated as manufacture rather than a taxable service, because the activity fell within the manufacturing character recognised under central excise law and was linked to Chapter 5810 of the Central Excise Tariff. The tribunal also found that the appellant and the proprietary concern were effectively the same entity, and the minor address variation did not alter that position. As the activity amounted to manufacture within section 2(f) of the Central Excise Act, 1944, the negative list entry for manufacturing activities applied, so the service tax demand and penalty under the Finance Act, 1994 were set aside.

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Issues: Whether embroidery work undertaken on job work basis amounts to manufacture and therefore falls outside the service tax net, with the result that the demand and penalty under the Finance Act, 1994 cannot survive.

Analysis: The activity of embroidery on fabric was found to be a manufacturing activity. The record showed that the appellant and the proprietary concern were one and the same, and the minor variation in address did not justify treating them as different entities. The work was treated as falling under Chapter 5810 of the Central Excise Tariff Act, 1985. The decision also relied on the settled position that when an activity amounts to manufacture within the meaning of section 2(f) of the Central Excise Act, 1944, it does not constitute a taxable service, and the negative list entry in section 66D(f) of the Finance Act, 1994 applies.

Conclusion: The embroidery activity was held to be manufacture and not a taxable service. The service tax demand and the penalty under section 78 of the Finance Act, 1994 were set aside.

Final Conclusion: The appeal succeeded and the appellant obtained complete relief against the confirmed service tax demand and consequential penalty.

Ratio Decidendi: An activity that amounts to manufacture under the Central Excise law cannot be taxed as a service under the Finance Act, 1994, and once the activity is found to be manufacturing in nature, the service tax demand and related penalty fail.

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