Job Work Amounting to Manufacture Can’t Be Taxed as Service: CESTAT

The Delhi Bench of the Customs, Excise & Service Tax Appellate Tribunal (CESTAT), New Delhi, has held that processes amounting to manufacture cannot be subjected to service tax, even if part of the work is outsourced to a sub-contractor. The bench of Binu Tamta, (Judicial Member) and P. V. Subba Rao (Technical Member) while setting aside the orders of the lower authorities, the Tribunal quashed a service tax demand of Rs. 18.37 lakh along with interest and penalty, ruling that the department cannot treat the same activity as “manufacture” for excise purposes and simultaneously as a “service” for service tax. The appeal arose from an order passed by the Commissioner (Appeals), Alwar, who had upheld the Assistant Commissioner’s order confirming service tax demand for the period 1 April 2014 to 30 September 2016. The demand was raised under the proviso to Section 73(1) of the Finance Act, 1994, along with interest under Section 75 and penalty equal to the tax amount under Section 78. The assessee was a registered manufacturer under central excise and was also registered with the service tax department. It had undertaken job work for a principal manufacturer, who supplied all raw materials for the manufacture of Polymer Master Batch. After processing, the finished goods were returned to the principal, who discharged central excise duty on the manufactured products. Intimations regarding this job work arrangement were duly filed with the department. During audit, the department took the view that the activities carried out did not amount to manufacture, and that the actual manufacturing was outsourced to a sub-contractor. On this basis, the department alleged that the assessee had merely rendered taxable services of processing of goods, making it liable to service tax. This view formed the basis of the show cause notice dated 13 July 2017 and the subsequent confirmation of demand. The Commissioner (Appeals) also relied on the clause in the agreement which allegedly prohibited sub-contracting and held that since the assessee had outsourced part of the work, it could not be said to have undertaken manufacture. The assessee argued that the processes undertaken did amount to manufacture. The principal manufacturer had accepted responsibility and paid central excise duty. Intimations were duly given to the department, and no objection was raised at any stage. Merely outsourcing part of the work to a sub-contractor does not change the nature of the activity. The department cannot treat the same activity as manufacture for excise and as service for service tax. The assessee argued that there was no contractual relationship (lis) between the principal and the sub-contractor, and therefore the department could not rely on internal contractual terms to recharacterise the activity. The Tribunal noted that during the relevant period, Section 66D(f) of the Finance Act, 1994, placed “any process amounting to manufacture or production of goods” in the negative list of services, and therefore outside the scope of service tax. The Bench held that once the department had accepted the activity as manufacture and allowed the principal manufacturer to pay excise duty, it was not open to the department to later claim that the same activity was not manufacture for the purpose of demanding service tax. The Tribunal rejected the argument that outsourcing part of the work changed the character of the activity. It observed, “Even if the appellant had violated some conditions of the contract, the processes which were actually manufactured cannot turn into a service.” The Bench made it clear that any breach of contract between the assessee and the principal is a private dispute, and the department, being a stranger to the contract, has no locus standi to rely on such clauses to raise tax demands. The Tribunal concluded that the activities in question amounted to manufacture. The principal manufacturer had already paid central excise duty. Therefore, no service tax was payable on the same activity. Case Details Case Title: Essem Polyalloys P Ltd Versus Commissioner Case No.: Service Tax Appeal No. 50303 Of 2021 Date: 06/01/2026 Counsel For Appellant: B.L. Yadav, Consultant Counsel For Respondent: Aejaz Ahmad, Authorised Representatative Click Here To Read Order Read More: Mining Is ‘Permissible Operation’ Under MOOWR, Quashes Cancellation of Private Bonded Warehouse Licences: CESTAT

Job Work Amounting to Manufacture Can’t Be Taxed as Service: CESTAT

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