Job work for medicaments held manufacture u/s 2(f), not taxable as Business Auxiliary Service consideration

CESTAT Kolkata allowed the appeal, holding that the appellant's job work/conversion activity for medicaments, using raw materials supplied by the principal, amounted to "manufacture" under Section 2(f) of the Central Excise Act, 1944. Consequently, the activity fell outside the ambit of "Business Auxiliary Service" under clause (v) of its definition, as only production not amounting to manufacture is taxable thereunder. Relying on prior CESTAT precedents and the CBEC Circular dated 27.10.2008, the Tribunal ruled that no service tax could be levied on the consideration received, set aside the impugned order, and rejected the service tax demand in full.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether the job work / conversion activity undertaken for manufacture of medicaments for a principal, on raw materials supplied by the principal, amounts to "manufacture" under Section 2(f) of the Central Excise Act, 1944 and is consequently excluded from levy of service tax under Section 66D(f) of the Finance Act, 1994.

1.2 Whether the consideration received for such activity can be classified and taxed as "Business Auxiliary Service" or any other taxable service in the absence of a specific service identified in the show cause notice and order.

1.3 Whether the mere description of income as "service income" in audited financial statements and its non-reflection in ST-3 returns is sufficient to sustain a service tax demand, interest and penalty, when the underlying activity is alleged to be manufacture and already subjected to central excise duty.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Characterisation of job work / conversion activity as "manufacture" and impact of negative list

Legal framework

2.1 The Court noted that the activity in question involves manufacture of medicaments on behalf of a principal using raw materials supplied by the principal, with clearance of finished goods on payment of applicable central excise duty. Such processes fall within "manufacture" as defined in Section 2(f) of the Central Excise Act, 1944.

2.2 The Court referred to Section 66D(f) of the Finance Act, 1994, which places "any process amounting to manufacture or production of goods" in the negative list, thereby excluding it from the levy of service tax.

Interpretation and reasoning

2.3 It was found as a matter of fact that the appellant manufactures medicaments for the principal under a contractual arrangement, using inputs supplied by the principal, and clears the final products on payment of central excise duty. These facts were not in dispute and had been accepted earlier in an appellate order dropping a similar demand on the basis of the same agreement.

2.4 The Tribunal relied on its earlier decision in Pharmanza India Pvt. Ltd., where it was held that production of goods on behalf of a client, when such activity amounts to manufacture in terms of Section 2(f) of the Central Excise Act, is excluded from the ambit of service tax and cannot be taxed as "Business Auxiliary Service".

2.5 The Tribunal also referred to the decision in Midas Care Pharmaceuticals, reiterating that an activity amounting to manufacture under Section 2(f) cannot simultaneously be regarded and taxed as a service, and that this position is supported by the CBEC Circular F.No.249/1/2006-CX-4 dated 27.10.2008, which clarifies that no service tax is leviable on such manufacturing/job work activities.

2.6 On these authorities and admitted facts, the Court held that the appellant's activity is a process amounting to manufacture and squarely falls within the negative list entry under Section 66D(f), making it non-taxable under the service tax law.

Conclusions

2.7 The job work / conversion activity undertaken by the appellant for the principal constitutes "manufacture" under Section 2(f) of the Central Excise Act, 1944.

2.8 Being a process amounting to manufacture, it is expressly covered by Section 66D(f) of the Finance Act, 1994 and is not liable to service tax.

Issue 2 - Classification as "Business Auxiliary Service" or other taxable service

Legal framework

2.9 The Tribunal referred to the statutory definition of "business auxiliary service" in Section 65(19) of the Finance Act, 1994, particularly sub-clause (v) ("production of goods on behalf of the client"), and the exclusion therein of "any activity that amounts to 'manufacture' within the meaning of clause (f) of section 2 of the Central Excise Act, 1944".

Interpretation and reasoning

2.10 Drawing from Pharmanza India Pvt. Ltd., the Tribunal reaffirmed that only those production activities which do not amount to "manufacture" under Section 2(f) can be taxed as "production of goods on behalf of the client" under "Business Auxiliary Service". If the activity is manufacture, it is expressly carved out from the definition and cannot be subjected to service tax under that head.

2.11 It was observed that in the present matter, the demand was raised solely based on the accounting classification of the receipts as "service income" in the audited financial statements, without cogent examination of the nature of the underlying activity and without identifying any specific taxable service category properly applicable to the transaction.

2.12 The Tribunal noted that in view of the admitted facts of manufacture and excise payment, and in line with its earlier decisions and the CBEC circular, the manufacturing activity could not be re-characterised as a taxable service, whether under "Business Auxiliary Service" or any other service category.

Conclusions

2.13 The consideration received by the appellant for the manufacturing / job work activity cannot be classified as "Business Auxiliary Service" or any other taxable service.

2.14 The service tax demand premised on such classification is unsustainable in law.

Issue 3 - Effect of accounting description and alleged non-disclosure in ST-3 returns

Interpretation and reasoning

2.15 The demand was founded on the premise that income shown as "service income" in audited financials but not declared in ST-3 returns represented taxable service receipts suppressed with intent to evade tax.

2.16 The Tribunal held that the mere nomenclature "service income" in accounts, without regard to the true nature of the activity, cannot override the legal characterisation of the underlying transaction as manufacture, particularly when central excise duty is paid and the process meets the statutory definition in Section 2(f) of the Central Excise Act.

2.17 Since the core activity itself is not liable to service tax by virtue of its character as manufacture and its coverage under the negative list, no demand of service tax, interest or penalty can be sustained merely on the basis of mismatch between financial statements and ST-3 returns.

Conclusions

2.18 The description of receipts as "service income" in the balance sheet and their non-reflection in ST-3 returns, when the underlying activity is manufacture, does not justify levy of service tax.

2.19 The service tax demand of Rs. 6,11,53,520/-, along with interest and penalty, was set aside, and the appeal was allowed with consequential relief.

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