TaxTMI 
TaxTMI 
2025 (6) TMI 122
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....ral Excise as well as Service Tax. The appellant has entered into a "job work agreement" dated 20.07.2010 with M/s. Britannia Industries Ltd. BIL for manufacture, packaging and delivery of biscuits on job work basis from the material and components supplied by BIL at the factory of the appellant and in turn receives consideration from BIL in form of "conversion charges", the break-up of which is into components such as labour, fuel, power, over-head, interest and depreciation. The consideration received from BIL has been recorded in balance sheet/financial statement in accordance with Accounting Standards as prevalent at the relevant time, the details thereof have been provided by the appellant as under : - Relevant Financial Year Reporting of the conversion charges in accordance with accounting standards as prescribed under the Companies Act in the Balance Sheet/Financial Statements. 2012-13 to 2014-15 Entire amount received from BIL recorded as "conversion charges" in the balance sheet in terms of Generally acceptable Accounting Procedure("GAAP") (erstwhile applicable Accounting Standard). 2015-16 The Application of Indian Accounting S....
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....ubmitting that the appellant have not rendered any service of "renting of immovable property" and referring to the various clauses of the agreement, he submitted that the consideration, which the appellant received from BIL was only towards manufacturing, packaging and delivery of the goods. The appellant had the exclusive right to use the factory premises for fulfilling its contractual obligations of manufacturing and delivering the goods. Interpreting the definition of "renting" as provided in Section 65B(41) of the Act, he submitted that the definition is in two parts, one is "means" clause and the second being the "inclusive" part. Explaining the terms "means" in the definition, he submitted that it covers " allowing, permitting or granting access, entry, occupation, use or any such facility, wholly or partly, in an immovable property, with or without transfer of possession or control of the said immovable property". He further submitted that the appellant itself was utilizing the factory premises and, therefore, the question of allowing occupation or use of factory to BIL does not arise. Reliance was placed on Clause 4.2 and 6.1 of the agreement. On the second part of the defi....
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....n merits, an alternative plea has been taken that the arrangement between the appellant and BIL is a bundled service with manufacturing service being of the essential character. It was, therefore, submitted that even if it is assumed that the agreement has a component of lease/renting by virtue of Clause 6.1, the same would be considered ancillary to the main activity of manufacturing. The impugned order has been challenged also on the ground of invocation of extended period of limitation and imposition of penalty. 7. Per contra, the Revenue has reiterated the findings of the authorities below. Referring to the Clause 4.2, it was submitted that it mandates the appellant to use the factory premises exclusively for manufacture of products for BIL, which implies that BIL has a de facto right to utilize the premises for its manufacturing needs. Further, under Clause 6.1, BIL has the right to inspect constitutes "permitting use" for consideration satisfying the definition of "renting". It was submitted that the financial statements from 2015-16 onwards reflect "interest" and "depreciation" components as "rental income" for aligning with Ind-AS17 requirements for lease accounting. Learn....
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....sition that the appellant had entered into an agreement with BIL. The title of the agreement itself says, "Job Work Agreement", where the status of the parties, i.e., BIL and the appellant has been referred to as the "company" and "contract manufacturer", respectively. The opening paragraph of the agreement provides company is engaged in the business of manufacture, packaging, sale, marketing, and distribution of a variety of bakery products under various trademarks and brand names owned by it. From Clause B(2)of the agreement, it appears that the contract manufacturer/appellant is the sole and absolute legal and beneficial owner of the factory. Since the factory meets the BIL standards with regard to the manufacturing packaging of biscuits, therefore, as stated in Clause (C), the contract manufacturer is desirous of utilising the factory to manufacture and package the products for the company on job work basis with the know-how, materials and components belonging to and supplied to it by the company. On the basis of the representations and warranties made by the contract manufacturer, the company agreed to permit the cont....
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....lects on the nature of the activity to be performed by the appellant are set out below:- 3.1 The contract manufacturer shall manufacture, package and deliver the products so manufactured and/or packaged from the materials and components supplied by the company at the factory strictly in accordance with the know-how. The term "factory" has been defined under the agreement as:- 1.4 "Factory" shall mean the factory premises of the Contract Manufacturer situated at Gola Ka Mandir, P.O. Residency, Gwalior-474 005 and shall include all the plant and machinery and equipment installed therein by the Contract Manufacturer at its own cost and used for the purpose of manufacture and/or packaging of biscuits. 4.1 The Contract Manufacturer should ensure that adequate space is provided for storage of inventory as per the prescribed Company norms, communicated from time to time. 4.2 The Contract Manufacturer shall use the entire Factory exclusively for the manufacture, packaging and storage of the products for the company and for no other purpose whatsoever. If the Contract Manufacturer wishes to engage in the manufacture and packaging of any products of his own or for any other p....
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....and the requirements for the purpose of manufacturing the products. This is not a case where the appellant has entered into any contract or even an understanding with BIL to let out the factory premises on rent. There is only one single agreement between the appellant and BIL which is exclusively for manufacture and production of goods on job work basis. Even in the said agreement, there is not a whisper about the use of the factory premises on rental basis. 11. The case put forward by the Revenue is that the factory is under the exclusive control of BIL, particularly with reference to Clause 4.2 and 6.1. In interpreting these provisions, the Revenue has misconstrued the term "factory" which in true import is only the "situs" for discharging the obligation by the appellant under the contract. As can be seen from Clause 4.2 (referred above), it is the appellant who has to use entire factory for the manufacture, packaging, and storage of the products exclusively for BIL. Similarly, Clause 6 in effect provides BIL the right to enter the factory premises, however, the same is limited for the purpose of inspection of material, components, products and also the process of manufacture an....
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....onship. An activity done without such a relationship, i.e. without the express or implied contractual reciprocity of a consideration would not be an activity for consideration, even though such an activity may lead to accrual of gains to the person carrying out the activity. We, therefore, hold that the conversion charges in the form of interest and depreciation does not qualify as a consideration for renting. The appellant is not a service provider and has not provided any type of service to BIL in the nature of renting of immovable property. 14. We may now consider the submission of the learned Counsel that the activity performed by them falls under the ambit of manufacture, which is covered in the negative list as provided under Section 66D(f) of the Act, which reads as under: Negative list of services. 66D. The negative list shall comprise of the following services, namely :- (f) services by way of carrying out any process amounting to manufacture or production of goods excluding alcoholic liquor for human consumption;] 15. In view of our discussion above that the agreement is solely and exclusively for the purpose of manufacturing of goods by the appellant, we have no ....
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.... or the Transfer of Property Act. We agree with the submissions of the learned counsel that the objective of the accounting standard is to ensure accurate disclosures in accounting principles and it cannot be utilised for classifying it as a transaction of lease for the purpose of taxation. Just because the component of conversion charges, i.e., interest and depreciation are shown under the head "rental income" in the books of accounts, it cannot be said that same is towards renting of immovable property and is, therefore, exigible to service tax. It is only a terminology used by the appellant whereas the actual nature of the amount is towards the manufacturing process carried out by them. The learned Authorised Representative for the Revenue on the contra has submitted that Ind-AS17 mandates recognising an arrangement as a lease if it conveys the right to use an asset for payment. We do not find any merit in the submission as from the terms of the agreement, we have already concluded that BIL does not have any right to use the immovable property, i.e. factory premises. The use of the factory is by the appellant for the purpose of discharging his obligations under the contract and ....
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....e reporting of income in the P and L is irrelevant for the purposes of determination of service tax payable and thus the basis of the impugned assessment is erroneous. Moreover, income reflected in the Balance Sheet is for Income Tax purposes, which cannot be used for the purpose of service tax without any corroboratory evidence as also supported by Luit Developers (supra) which held in Para 11 that, "....Also, figures shown to Income Tax authorities cannot be used to determine Service Tax as held in Synergy Audio Visual Workshop Pvt. Ltd. (supra) and Deluxe Enterprises (supra)." The same proposition was applied in Indian Machine Tools Manufacturers Association (supra) which held in its Para 11 that,".......we are of the considered opinion that it is not open for the Department to raise demands on the basis of other statutory returns like Income Tax Returns or balance sheets without proving that such service has been rendered by the assessee and consideration thereof has been received. ". Notably, the Hon'ble Punjab & Haryana High Court in Mayfair Resorts (supra) held that the Department had to show evasion of Service Tax and that the money found with the assessee rep....