Manufacture versus service tax: processing under a GCPL arrangement was held to be manufacture, barring service tax demand.

Activity undertaken under a principal-to-principal processing arrangement was treated as manufacture, not a taxable service, because the raw material, machinery and technical know-how were supplied by GCPL while the appellant used its labour and premises to produce goods cleared on central excise duty. Applying its earlier decisions on identical arrangements, CESTAT held that once the activity satisfied manufacture under section 2(f) of the Central Excise Act, 1944, it could not be subjected again to service tax under the Finance Act, 1994, including under the negative list regime. The service tax demand was therefore unsustainable and was set aside.

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Issues: Whether the activity undertaken by the appellant for GCPL amounted to manufacture or a taxable service and, if manufacture, whether service tax could be demanded under the Finance Act, 1994.

Analysis: The activity was carried out under an arrangement where raw material, machinery and technical know-how were provided by GCPL, while the appellant used its own labour and factory premises and raised charges on a per piece basis. The manufactured goods were cleared on payment of central excise duty by GCPL. The Tribunal followed its earlier decisions on identical Godrej-related processing/manufacturing arrangements and held that the substance of the transaction was manufacture and not provision of business support service. Once the activity fell within manufacture under section 2(f) of the Central Excise Act, 1944, it could not be taxed again as a service, including under the negative list regime.

Conclusion: The demand of service tax was unsustainable and was set aside; the appeal succeeded.

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