2025 (9) TMI 997 - AT - Service Tax

Service tax demand and penalty under s.78 quashed as embroidery held manufacturing, levy based on ITR income set aside

Shri Momin Husain Versus Commissioner of Central Excise & Service Tax, Lucknow

CESTAT set aside the service tax demand and penalty under s.78 arising from levy based on ITR income for 2015-16. The tribunal found the impugned order ... Levy of Service Tax on the basis of income shown in the ITR for the year 2015-16 - impugned order passed without properly appreciating the facts and the relevant provisions of law and their findings are based on assumption and conjecture - HELD THAT:- It is further found that the Ld. Commissioner (Appeals) has also observed that no documentary evidence has been brought on record to establish that appropriate excise duty has been paid on the goods on which the Appellant claims to have performed job work and hence benefit of clause (f) of Section 66D of the Negative list of Finance Act would not be available. Once the activity is clearly discernible as manufacturing activity of goods as specified under CETA, the said activity would go out of the purview of service tax. It is also found that the Appellant has issued bills for his embroidery work to miscellaneous customers mentioning work of embroidery therein. The demand of Service Tax cannot be sustained and is set aside - penalty imposed u/s 78 is also set aside - appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the activity of providing embroidery work (including on job-work basis) is a taxable service or a manufacturing activity outside the service-tax net under clause (f) of Section 66D (Negative List) of the Finance Act, 1994. 2. Whether absence of documentary evidence of payment of excise duty (or non-registration under Central Excise) disentitles the appellant to claim that the activity is manufacturing and hence outside service-tax, particularly where small-scale exemption may have applied. 3. Whether differences in the manner of recording an individual's and firm's address in bills/records justify treating the individual and the firm as distinct persons for the purpose of tax liability and denial of benefit of the Negative List. 4. Whether penalty under Section 78 of the Finance Act, 1994 is sustainable where the primary demand for service tax is found unsustainable. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Characterisation of Embroidery Work as Manufacturing vs. Taxable Service Legal framework: Clause (f) of Section 66D (Negative List) excludes from service tax 'services ... relating to manufacture' of goods specified under the Central Excise Tariff Act; Central Excise classification (Chapter headings) determines whether an activity amounts to manufacture; service-taxability depends on whether the activity is a 'taxable service' and not a manufacture. Precedent treatment: The Tribunal relied on an authoritative Board communication (CBIC letter dated 15.07.2011) which treated embroidery work (including on job-work basis) as manufacturing falling under Chapter heading 5810 of the Central Excise Tariff Act and held it outside the then Business Auxiliary Services (BAS) and therefore not taxable as service. Interpretation and reasoning: The Court accepted that the process of carrying out embroidery on plain cloth/fabric creates a distinctly new commercial product (embroidered goods) and thus constitutes manufacture. The SRO/CBIC letter was applied as determinative guidance that embroidery is covered under Chapter 5810; tariff entries and description (e.g., embroidery in the piece, in strips or in motifs) and corresponding excise rate were used to show the activity is captured by CETA. Ratio vs. Obiter: Ratio - where an activity results in a new commercially distinct product falling within a CETA chapter (here 5810), that activity is manufacturing and excluded from service tax under the Negative List; the CBIC clarification is treated as binding guidance for characterisation. Obiter - ancillary observations about interplay with specific service notifications (e.g., non-application of Notification No.8/2005-S.T.) serve as interpretative support but are not the operative holding beyond the textile embroidery context. Conclusions: Embroidery (including job-work embroidery) is a manufacturing activity under Chapter 5810 of the CETA and therefore falls outside the service-tax net under clause (f) of Section 66D; demand for service tax on embroidery receipts is unsustainable. Issue 2 - Effect of Absence of Documentary Evidence of Excise Payment / Excise Registration and Relevance of SSI Exemption Legal framework: Liability under service tax depends on characterisation of activity; entitlement to Negative List benefit does not necessarily require prior excise payment where the activity is inherently manufacture. Small Scale Industry (SSI) exemption/notifications under Central Excise law exempt certain turnover slabs from excise duty, potentially explaining absence of excise payments or excise invoices. Precedent treatment: The adjudicatory view that lack of documentary proof of excise payment negates claim to the Negative List was considered but assessed against available statutory exemptions and records showing turnover below exemption thresholds. Interpretation and reasoning: The appellant's turnover (Rs.43.20 lakhs for 2014-15 to 2015-16) was materially below the SSI exemption limit (as per the notification referenced), meaning there was no excise liability or requirement to pay excise duty or to maintain excise documentation. Therefore absence of excise duty payment could not be taken as evidence that the activity was a taxable service; the Court examined balance sheet, ledger and ITR which consistently described the business as embroidery/manufacture and supported the appellant's bona fide belief and factual position. Ratio vs. Obiter: Ratio - absence of excise duty payment is not decisive against a claim that an activity is manufacturing where statutory SSI exemption applies and where records corroborate manufacturing character; demanding documentary proof of excise payment in such circumstances is legally misplaced. Obiter - remarks on applicability of specific excise notifications are contextual and not generalized beyond similar factual matrices. Conclusions: The Commissioner's reliance on lack of excise payment to deny Negative List protection was unsustainable given the applicable SSI exemption and the appellant's consistent financial records; entitlement to manufacturing character (and thus non-taxability under service tax) stands despite absence of excise payments. Issue 3 - Identity of Person and Firm: Significance of Minor Address Variations Legal framework: Tax liability and entitlement to benefits depend on identity of taxable person; however minor discrepancies in address presentation do not, per se, establish different legal persons where other records consistently link the individual and the firm. Precedent treatment: The Commissioner's tentative inference that different address descriptions meant different persons was tested against contemporaneous books (balance sheet, ledger) and ITR showing the same house number and locality and clear proprietorship link. Interpretation and reasoning: The tribunal inspected the addresses in bills, balance sheet, ledger and ITR and found the same house number and mohalla, with only minor variation in lane/street nomenclature and an appended suffix for the firm address. The proprietor's name consistently linked the firm and the individual. The Court held that such minor differences are not substantive and cannot justify treating them as separate entities for tax purposes. Ratio vs. Obiter: Ratio - minor variations in address entries, when contradicted by consistent proprietorship and financial records, do not constitute a basis for denying that the individual and the firm are the same person. Obiter - observations on administrative expectations for consistent addressing are persuasive but not necessary to the holding. Conclusions: The individual and the firm are one and the same for tax purposes; the Commissioner's suspicion based solely on slight address variants was not a valid ground to displace the appellant's entitlement to claim manufacturing character. Issue 4 - Sustainment of Penalty Where Primary Demand is Unsustainable Legal framework: Penalties under Section 78 of the Finance Act are consequential to imposition of tax and demands; if the tax demand is set aside, the legal foundation for penal consequences is undermined. Precedent treatment: The tribunal examined the nexus between the set-aside tax demand and the penalty. The Commissioner (Appeals) had earlier waived penalty under Section 77 but confirmed penalty under Section 78; the tribunal revisited that confirmation in light of the primary finding on taxability. Interpretation and reasoning: Given the tribunal's conclusion that embroidery is manufacturing and not taxable as service, the tax demand could not be sustained; consequently, the penalty predicated on that demand also falls away. No separate finding of culpable conduct justified sustaining the Section 78 penalty independent of the tax demand. Ratio vs. Obiter: Ratio - when the underlying tax demand is quashed due to absence of liability, penalty imposed for that demand must also be set aside unless independent justification exists. Obiter - remarks on the earlier waiver under Section 77 are contextual and not relied upon beyond noting consistency in remedial outcome. Conclusions: The penalty under Section 78 is set aside as consequential to the quashed service-tax demand. Final Disposition The demand for service tax based on income shown in income tax returns for the relevant year is unsustainable because embroidery work is manufacturing under Chapter 5810 of the CETA and excluded from service tax under the Negative List; the Section 78 penalty is also set aside; the appeal is allowed with consequential reliefs as per law.