2018 (5) TMI 1676 - AT - Service Tax

Job work - Demand of service tax - Manufacturing activity or not - appellant are undertaking rubber backing and rubber edging of polypropylene carpets on job work basis - whether the activity carried out by the appellant amounts to manufacture as defined under Section 2(f) of the Central Excise Act, 1944? - Held that - The appellant is undertaking the work of rubber backing and edging and also using the polypropylene sheet supplied by the principal-manufacturer which amounts to manufacture of rubber mats falling under Tariff Heading 4016 9100 - also, appellant is paying the VAT on the product. Demand set aside - appeal allowed - decided in favor of appellant.

Summary

Issues:
1. Whether the activity undertaken by the appellant amounts to manufacture as defined under Section 2(f) of the Central Excise Act, 1944.

Detailed Analysis:
The appellant, a manufacturer of rubberized coir and other rubber products, undertook rubber backing and edging of polypropylene carpets on a job work basis for a client. The Order-in-Original held this activity as a taxable service under 'Business Auxiliary Service' as per Section 65(19) of the Finance Act, 1994. Consequently, a service tax demand of ?3,83,162/- along with penalties and interest was imposed. The appellant challenged this before the Commissioner (A), who upheld the original order, leading to the present appeal.

The appellant argued that their activity constituted manufacturing as per Section 2(f) of the Central Excise Act and thus fell outside the scope of service tax. They contended that manufacturing rubber mats from polypropylene sheets provided by the client qualified as production under Central Excise Tariff Act. Citing precedents like Delhi Cloth and General Mills Co. Ltd. vs. UOI and South Bihar Sugar Mills Ltd. vs. UOI, the appellant emphasized the transformation of raw materials into a distinct product. They also highlighted paying VAT on the final product and referenced a similar case where the Revenue had dropped service tax demands.

After hearing both parties and reviewing the facts, the Tribunal focused on determining whether the appellant's activity constituted manufacturing under Section 2(f) of the Central Excise Act. It noted that the appellant's work of rubber backing and edging, using polypropylene sheets supplied by the principal manufacturer, resulted in the manufacture of rubber mats falling under a specific tariff heading. The Tribunal considered the clarification from the Government stating that service tax does not apply if the activity amounts to manufacturing. Additionally, it referenced a case involving M/s. Dolphin Rubber Products where a similar activity was deemed as manufacturing, leading to the dropping of service tax demands. Ultimately, the Tribunal concluded that the demand for service tax was unsustainable in law, setting it aside and allowing the appeal with any consequential relief for the appellants.