The Customs, Excise and Service Tax Appellate Tribunal, Hyderabad Bench has held that manufacturing activity carried out on a job work basis cannot be artificially classified as “renting of immovable property services” to levy service tax. 

The bench of Angad Prasad (Judicial Member) and A.K. Jyotishi (Technical Member) set aside the demand holding that the activity amounted to manufacture and was therefore outside the scope of service tax. The appellant retained control over manufacturing operations, including manpower and compliance obligations. Workers were employed and paid by the appellant, even though costs were reimbursed. The arrangement was consistent with standard industry practices such as loan licensing in the pharmaceutical sector. There was no separate agreement or intention to lease or rent the premises to APL.

The appellant/assessee, Teena Labs Ltd was engaged in the manufacture of bulk drugs and pharmaceutical formulations. The company had entered into a job work agreement with APL to manufacture products using its own facilities. Under the agreement, Teena Labs received fixed monthly conversion charges along with reimbursement of expenses such as power, fuel, water, and maintenance.

The Department took the view that the agreement effectively granted APL exclusive use of the appellant’s factory premises, plant, and machinery. On this basis, it sought to classify the activity as “Renting of Immovable Property Services” under the Finance Act, 1994 and demanded service tax.

The core issue before the Tribunal was whether the activity undertaken by the appellant constituted manufacturing (and thus excluded from service tax) or was in the nature of renting of immovable property.

The Tribunal noted that there was no dispute that the appellant was engaged in manufacturing excisable goods on behalf of APL. It emphasized that under the definition of Business Auxiliary Services (BAS), any activity that amounts to “manufacture” within the meaning of Section 2(f) of the Central Excise Act, 1944 is specifically excluded from service tax.

Rejecting the Department’s classification, the Tribunal observed that merely because the agreement imposed operational controls or included reimbursement components, it could not be concluded that the factory was rented out.

The Tribunal clarified that the nature of the transaction—not the structure of payments—determines taxability, rejecting the Department’s reliance on the method of compensation to classify the activity as renting.

It further reiterated a settled legal principle: an activity cannot simultaneously be treated as manufacture (subject to excise) and as a service (subject to service tax).

On the issue of inclusion of reimbursable expenses in taxable value, the Tribunal relied on the landmark judgment of the Supreme Court in Intercontinental Consultants & Technocrats Pvt Ltd, holding that such reimbursements cannot be subjected to service tax.

Allowing the appeal, the Tribunal held that the activity undertaken by Teena Labs was manufacturing on a job work basis and not renting of immovable property. Even if examined under BAS, the activity would be excluded as it amounted to manufacture. Service tax demand, including on reimbursable expenses, was unsustainable. Consequently, penalties also could not survive.

The tribunal set aside the order in entirety, providing significant relief to the appellant.

Case Details

Case Title: M/s Teena Labs Ltd. Versus Commissioner of Central Tax Medchal

Citation: JURISHOUR-1066-CES-2026(HYD) 

Case No.: Service Tax Appeal No. 26793 of 2013

Date: 30.04.2026

Counsel For  Appellant: S. Thirumalai, Advocate

Counsel For Respondent:  M. Anukathir Surya, AR

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