2026 (2) TMI 181 - AT - Service Tax

Textile processing classification as manufacture leads to service tax relief; renting and reversecharge demands partly upheld.

Textile processing is held to amount to manufacture under excise law for the period before 30.06.2012, resulting in setting aside the servicetax demand, ... Manufacture as defined u/s 2(f) - exemption of textile processing from service tax by notification - extended period of limitation invoked for suppression of facts - suppression of facts with intent to evade payment of tax - reverse charge mechanism for service tax - penalty for failure to obtain registration u/s 77(1)(a) of the Finance Act, 1994 - HELD THAT:- We hold that the activity of ‘textile processing’ undertaken by the appellant amounts to 'manufacture' as defined under section 2(f) of the central Excise Act, 1944, for the period prior to 30.06.2012. Therefore, the demand of Service Tax confirmed vide the impugned order for the activity of ‘textile processing’ for the period from 2011-12 and 2012-13 (up to 30.06.2012) is set aside. The interest demanded and penalty imposed in respect of this demand is also set aside. The demands in respect of ‘renting of immovable property’ and ‘renting of machinery’, are confirmed. However, the matter is remanded back to the adjudicating authority for the purpose of re-quantification. The appellant is liable to pay the final tax demand confirmed, along with applicable interest. They are also liable to pay penalty equal to the Service Tax demand confirmed after re-quantification. However, if the tax due along with interest and penalty is paid within 30 days from the date of issue of the order of confirmation, then the said penalty shall stand reduced to 25% of the Service Tax payable. The demands confirmed in the impugned order under the categories of ‘goods transport agency service’, ‘security charges’ and ‘labour charges’ under reverse charge mechanism are set aside. The demand of interest and imposition of penalties in respect of these services are also set aside. The demand confirmed in the impugned order under the category of ‘legal charges’ is not contested and hence, the said demand is upheld. We uphold the penalty imposed on the appellant under Section 77(1)(a) of the Finance Act, 1994. The appeal is disposed of in the above manner. Issues: (i) Whether the activity of textile processing undertaken by the appellant for the period 2011-12 and up to 30.06.2012 amounts to 'manufacture' and whether the Service Tax demand confirmed for that period under 'business support service' is sustainable; (ii) Whether demands in respect of renting of immovable property and renting of machinery can be sustained by invoking the extended period of limitation; (iii) Whether demands confirmed under 'goods transport agency', 'security charges' and 'labour charges' on reverse charge basis are sustainable; (iv) Whether the demand under 'legal charges' is to be upheld; (v) Whether penalty under Section 77(1)(a) of the Finance Act, 1994 is sustainable.Issue (i): Whether textile processing for 2011-12 and up to 30.06.2012 amounts to 'manufacture' and whether Service Tax demand under 'business support service' is sustainable.Analysis: The adjudicating authority had held that specified processes constitute 'manufacture' for the period after 30.06.2012 and dropped demand for that period; identical processes were carried out prior to 30.06.2012. Relevant notifications exempting textile processing from Service Tax were considered.Conclusion: The activity of textile processing for the period 2011-12 and up to 30.06.2012 amounts to 'manufacture' and the Service Tax demand under 'business support service' for that period is not sustainable; the demand, interest and penalty in respect thereof are set aside.Issue (ii): Whether demands in respect of renting of immovable property and renting of machinery are sustainable and whether extended period of limitation was rightly invoked.Analysis: The appellant did not declare these renting activities in the balance-sheet or Income Tax Returns; non-declaration was found to constitute suppression with intent to evade tax. The appellant's citations were found inapplicable to the established facts.Conclusion: Suppression with intent established; extended period was rightly invoked; demands in respect of renting of immovable property and renting of machinery are confirmed. The matter is remanded for re-quantification of the tax demand; interest and penalty equal to the confirmed tax after re-quantification are payable (with a conditional reduction of penalty on prompt payment as specified by the Tribunal).Issue (iii): Whether demands under 'goods transport agency', 'security charges' and 'labour charges' on reverse charge basis are sustainable.Analysis: Evidence shows receipt of CHA services (not G T A) and service providers had invoiced and collected Service Tax for security and labour services; appellant paid tax to service providers.Conclusion: Demands under 'goods transport agency', 'security charges' and 'labour charges' on reverse charge basis are not sustainable and are set aside; corresponding interest and penalties are set aside.Issue (iv): Whether the demand under 'legal charges' is contestable.Analysis: The appellant did not contest the demand for legal charges and accepted liability.Conclusion: The demand under 'legal charges', along with interest and penalty, is upheld.Issue (v): Whether penalty under Section 77(1)(a) of the Finance Act, 1994 is sustainable.Analysis: Section 77(1)(a) penalises failure to take required registration; appellant was held liable to pay Service Tax on renting services and had not taken registration for those services.Conclusion: Penalty under Section 77(1)(a) is upheld.Final Conclusion: The appeal is partly allowed by setting aside Service Tax demands, interest and penalties in respect of textile processing, goods transport agency, security and labour charges, while confirming demands (subject to re-quantification) and penalty for renting of immovable property and machinery, upholding the demand for legal charges and upholding the registration penalty under Section 77(1)(a) of the Finance Act, 1994.Ratio Decidendi: Where identical processes are found to constitute 'manufacture' under Section 2(f) of the Central Excise Act, 1944 and relevant notifications exempt the processing activity from Service Tax, the activity is to be treated as 'manufacture' for all relevant periods and Service Tax demands framed as business support services are not sustainable; non-declaration of renting activities in statutory filings amounts to suppression warranting invocation of the extended period and imposition of penalty for failure to obtain registration.