2025 (11) TMI 1338 - AT - Service Tax

Heat treatment job work held manufacture, not Business Auxiliary Service; no service tax, exemption under Notification 8/2005-ST

M/s. H.V. Transmission Limited [Now known as 'M/s. TML Drivelines Limited' Versus Commissioner of C.G.S.T. and Central Excise, Jamshedpur

CESTAT Kolkata held that the heat treatment carried out by the appellant on parts supplied by a principal amounts to manufacture and therefore cannot be ... Nature of activity - Process amounting to manufacture or business auxiliary service? - activity of heat treatment performed by the appellant on parts supplied by the principal - revenue neutralitty - extended period of limitation - eligibility for benefit of N/N. 8/2005-ST dated 01.03.2005, as amended by N/N. 19/2005-ST dated 07.06.2005 - HELD THAT:- It is observed that the issue with respect to process of heat treatment amounting to manufacture or not, is no longer res integra as the said issue stands decided by this Tribunal as well as various other forums in favour of the assessees - It is also found that this Tribunal in the Appellant’s own case in M/s TML Drivelines Limited v. Commissioner of Central Excise, Jamshedpur [2024 (8) TMI 1649 - CESTAT KOLKATA] pertaining to the period 10.09.2004 to 28.02.2005 and concerning the same issue held that the activity of heat treatment amounts to manufacture. It is found that the same view has been taken by the Tribunal, Chennai in the case of M/s Excel Industries v. Commissioner of GST and Central Excise, Tiruchirapalli, [2024 (5) TMI 1341 - CESTAT CHENNAI], wherein the Tribunal has held that the said activity of heat treatment amounts to manufacture. It is also observed that when the activity undertaken by the appellant amounts to manufacture, the same cannot be said to be an activity falling under Business Auxiliary Service. In the case of CCE, Pune-II v. Hi-Tech Induction Pvt. Ltd. [2014 (1) TMI 563 - CESTAT MUMBAI] the Tribunal held that the activity undertaken by the respondents amounted to manufacture and did not fall under the category of ‘Business Auxiliary Service’ where after the work of heat treatment on crank shafts, the same were returned back to the principal manufacturer who cleared the same upon payment of excise duty. Thus, no service tax can be levied on the job work charges paid by HVAL to the Appellant as the same has been included in the assessable value of the goods of HVAL, on which excise duty has already been paid. Benefit of N/N. 8/2005-ST dated 01.03.2005, as amended by N/N. 19/2005-ST dated 07.06.2005 - HELD THAT:- The said notification exempts the taxable service of production or processing of goods for or on behalf of the client referred in sub-clause (v) of clause (19) of section 65 of the Finance Act, from the whole of service tax leviable thereon under section 66 of the Finance Act. Thus, we observe that the appellant has been undertaking the process of heat treatment on raw materials provided by HVAL and thereafter the Appellant is sending it back to HVAL which is being used by them for the manufacture of axles and parts thereof and the resultant products are cleared to TML upon payment of excise duty. Thus, the appellant has fulfilled all the requirements of the Notification and hence they are eligible for the benefit of exemption of the said notification. Revenue Neutrality - HELD THAT:- Reliance placed on the decision of M/s H. V. Transmission Ltd. v. CCE, Jamshedpur, [2023 (12) TMI 118 - CESTAT KOLKATA] wherein this Tribunal has set aside the demand of excise duty on the grounds of revenue neutrality. Reliance is also placed on the judgment of Commr. Of C. Ex., Ahmedabad-II Versus Reclamation Welding Ltd. [2014 (8) TMI 186 - CESTAT AHMEDABAD], wherein the demand of excise duty was inter alia set aside on the ground of revenue neutrality on goods supplied after job work to the subsidiary company which was available as credit in the hands of the subsidiary company. Extended period of limitation - HELD THAT:- It is observed that it is a settled principle of law that extended period cannot be invoked in case of revenue neutral situation. Reliance in this regard is placed on the Hon’ble Apex Court judgment pronounced in the case of Nirlon Ltd. Versus Commissioner of Central Excise, Mumbai [2015 (5) TMI 101 - SUPREME COURT]. In the instant case, it is found that the issue involved is purely interpretational in nature. In view of the above, the demand confirmed invoking extended period of limitation is liable to be set aside on the ground that the issue is one of interpretation. The demand of service tax confirmed in the impugned order is not sustainable and hence, the same is set aside. As the demand itself is not sustainable, the question of demanding interest or imposing penalty does not arise and hence the same is set aside. Appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the activity of heat treatment performed by the appellant on parts supplied by the principal amounts to 'manufacture' within the meaning of the Central Excise law or is a taxable service under the category 'Business Auxiliary Service'. 2. Whether the consideration for such heat-treatment/job work is chargeable to service tax when the resultant goods are cleared on payment of excise duty by the principal (revenue-neutrality/duplication of levy). 3. Whether the demand confirmed invoking the extended period of limitation is sustainable where the issue is interpretational and/or revenue-neutral. ISSUE-WISE DETAILED ANALYSIS Issue 1: Characterisation - Heat treatment as 'manufacture' v. 'Business Auxiliary Service' Legal framework: Definition of 'manufacture' under section 2(f) of the Central Excise Act and Note 6 to Section XVII of the First Schedule to the Central Excise Tariff Act (conversion of incomplete/unfinished product into complete/finished product amounts to manufacture); definition/scope of 'Business Auxiliary Service' under the Finance Act. Precedent treatment: This Tribunal and other benches have consistently held that processes such as heat treatment, cutting, punching, drilling, etc., that convert unfinished components into usable parts for manufacture amount to 'manufacture' (decisions relied upon include prior Tribunal decisions in identical or analogous fact-situations where heat treatment on crankshafts/steel parts was held to be manufacture). Specific prior Tribunal decisions on the appellant's earlier period have held heat treatment to be manufacture. Interpretation and reasoning: The heat treatment carried out changed the physical properties and rendered supplied parts suitable and essential for incorporation in excisable goods (axles/gearboxes). The process thus converts an incomplete/unfinished input into a finished/usable component, falling squarely within Note 6 and the statutory definition of manufacture. Where activity amounts to manufacture, it by definition is excluded from the scope of Business Auxiliary Service as envisaged under the service tax charging provisions. Ratio vs. Obiter: Ratio - heat treatment performed on parts supplied by the principal that makes them suitable for incorporation into excisable goods amounts to manufacture and is not a Business Auxiliary Service. Obiter - citations of other similar processing activities supporting the view. Conclusion: Heat treatment in the facts of the case is manufacturing activity; consequently it does not fall under Business Auxiliary Service and is not exigible to service tax as such. Issue 2: Revenue neutrality and duplication of levy - service tax v. excise Legal framework: Chargeability of service tax on 'production or processing of goods for or on behalf of the client' and Notification exempting such services when conditions are met; inclusion of job work charges in assessable value for excise duty when goods are subsequently cleared by the principal. Precedent treatment: Tribunal decisions have set aside demands where (a) the principal cleared the worked goods on payment of excise duty after including job-work charges in the assessable value, and (b) any service tax, if charged, would result in duplication because credit would be available to the principal (revenue-neutrality doctrine). Apex Court authority establishes that extended period cannot be invoked in revenue-neutral cases. Earlier Tribunal orders in materially similar fact-situations (including the appellant's own earlier appeals) support relief on revenue-neutrality grounds. Interpretation and reasoning: The appellant performed processing on inputs supplied by the principal and returned the processed articles to the principal, who cleared the final excisable goods on payment of duty and included job-work charges in the assessable value. Under the Notification granting exemption for production/processing for the client, the activity meets the conditions for exemption. Further, application of service tax on the job work charges when those same charges have been subjected to excise duty in the hands of the principal would create duplication of tax incidence; moreover any service tax, if levied, would be available as credit to the principal rendering the demand effectively revenue-neutral for the revenue. Ratio vs. Obiter: Ratio - where job-work/processing charges are included in assessable value and the principal clears the excisable goods on payment of duty, a demand of service tax on the job-work charges is not sustainable (duplication/revenue-neutrality); such processing may also be covered by the exemption notification. Obiter - discussion on the operation of input tax credit and its practical effect. Conclusion: The consideration for heat-treatment/job work cannot be subjected to service tax in the present facts because (i) the activity is manufacture, (ii) the conditions of the exemption notification are satisfied, and (iii) levying service tax would cause duplication where the principal has paid excise duty after including job-work charges (revenue-neutrality). Accordingly, the demand is unsustainable. Issue 3: Extended period of limitation - applicability where issue is interpretational/revenue-neutral Legal framework: Provisions permitting extended period where suppression of facts or fraud is found; jurisprudence holding extended period inapplicable where issue is bona fide interpretational or where demand is revenue-neutral. Precedent treatment: Supreme Court authority and Tribunal decisions indicate extended limitation cannot be invoked in revenue-neutral situations and is inappropriate for purely interpretational questions of law. Interpretation and reasoning: The demand arises from a contested question of characterisation of the activity (manufacture v. taxable service) and the consequence of levy given the principal's clearance on payment of excise duty and inclusion of job-work charges in assessable value. The issue is essentially interpretational and also involves revenue-neutral considerations; therefore invoking extended limitation is legally impermissible in this context. Ratio vs. Obiter: Ratio - extended period of limitation cannot be invoked where the demand is based on an interpretational issue and/or where revenue-neutrality is established. Obiter - references to specific factual permutations where extended period may remain available are ancillary. Conclusion: The extended period of limitation relied upon for confirming the demand is not invokable in the present interpretational and revenue-neutral circumstances; accordingly demands confirmed on that ground are to be set aside. Overall Conclusion Combining the above: (a) heat treatment constitutes manufacture and is not a Business Auxiliary Service in the facts before the Tribunal; (b) the processing charges were included in assessable value and the principal cleared the excisable goods on payment of duty, satisfying the exemption notification and creating a revenue-neutral position; (c) extended limitation cannot be invoked in these circumstances. Therefore the confirmed demand of service tax, interest and penalty is unsustainable and is set aside. (Operative relief follows.)