2021 (2) TMI 704 - Commissioner - Service Tax

Nature of activity - service or manufacturing? - Design Services or not - allegation is that appellant failed to pay service tax on gross amount received by them by way of suppressing the value of services willfully with intent to evade payment of Service Tax - contravention of provisions of Section 68,69 70 of the Finance Act 1994, as amended read with Rules 4,6 7 of the Service Tax Rules 1994 - HELD THAT - It is on records that the designs/ drawings of the die/moulds etc. (tooling for manufacturing final Products) are being provided by the overseas buyers of the appellants and upon manufacturing of said tooling kits the appellants have realized charges from their overseas buyers. From the foregoing, it transpires that, the appellants have, in fact not designed the tooling kits or made drawings for the same. They have only manufactured the tooling kits as per the drawings provided by their overseas buyers and the same tolling kit is thereafter used for the manufacture of dutiable forgings which are to be sold to the same overseas buyers. The prime activity of the appellants is manufacturing and as per the agreement/contract/ purchase order, they have to manufacture goods only as per the specification of their buyers and the design of the said goods is also very specific. To meet out the requirements of their buyer they first manufacture the tooling kit for the production of goods and they charge the manufacturing cost of the tooling kit in the head of Die design preparation charges . From the records it appears that, the appellants themselves not design the said tooling kit but they only manufacture the same on the basis of drawings provided by their customers. Further, it is found that the period of demand starts from 2014-15 onwards, whereas, prior to 01.07.2012 the classification was being done as per the provisions of Section 65A read with Section 65(105 of the Finance Act, 1994. However, the earlier method of classification was done away w.e.f, 01.07.2012 and negative list regime has came in to existence wherein service has been defined as any activity for consideration (Section 65B of the Act) and there remains no categorization of service. All the activities for consideration were held to be service except those which specifically mentioned in the negative list in terms of Section 66D of the Finance Act - classification of the impugned activities had been done under earlier Section 65(105)(zzzzd) of the Finance Act, 1994 read with Section 65A of the Act. Whereas, the said statute has lost its existence w.e.f, 01.07.2012 and in absence of proper legal backing, the classification done in the instant cases for the period from 2014-15 onwards and demand of service tax thereof cannot be held as legal and proper. The impugned activities cannot be termed as service rather manufacturing. Hence, the demand of service tax in the instant cases does not sustain - Appeal allowed - decided in favor of appellant.

Summary

Issues Involved:
1. Classification of activities under "Design Service"
2. Applicability of service tax on the activities
3. Consideration of activities as manufacturing
4. Legal precedents and previous judgments
5. Invocation of extended period of limitation
6. Imposition of penalties

Issue-wise Detailed Analysis:

1. Classification of Activities under "Design Service":
The primary issue is whether the activities of the appellant fall under the taxable category of "Design Service." The appellant argued that the activities involve manufacturing tooling kits based on designs provided by overseas buyers, not designing the kits themselves. The tribunal concluded that the appellant's activities are primarily manufacturing, not design services.

2. Applicability of Service Tax on the Activities:
The Show Cause Notice alleged that the appellant failed to pay service tax on "Design Services" for the financial years 2014-15 to 2015-16. The appellant contended that post-01.07.2012, there is no classification of services under the Finance Act, 1994, and the activities should not be taxed as design services. The tribunal agreed, noting that the classification under Section 65(105)(zzzzd) was no longer applicable post-01.07.2012, and the demand for service tax was not legally sustainable.

3. Consideration of Activities as Manufacturing:
The appellant asserted that their activities amounted to manufacturing, which is not subject to service tax. The tribunal supported this view, referencing the definition of manufacture under Section 2(F) of the Central Excise Act, 1944, and relevant case law. The tribunal found that the appellant's activities fit the definition of manufacturing, as they bring new products (tooling kits) into existence.

4. Legal Precedents and Previous Judgments:
The appellant cited previous judgments, including a decision by the Hon'ble Tribunal Kolkata in their favor, stating that no service tax is payable on the development of tools, dies, and molds. The tribunal referenced similar judgments, such as those in the cases of Metzeler Automotive Profiles Pvt. Ltd and Ashok Iron Works Ltd, which supported the appellant's position that the activities were manufacturing, not design services.

5. Invocation of Extended Period of Limitation:
The appellant argued that the extended period of limitation could not be invoked as there was no intent to evade tax or suppression of facts. The tribunal did not find it necessary to address this issue in detail, as the primary demand for service tax was not sustainable.

6. Imposition of Penalties:
The appellant contended that no penalties should be imposed as there was no contravention of law. The tribunal agreed, stating that since the demand for service tax was not sustainable, the question of interest and penalties did not arise.

Conclusion:
The tribunal concluded that the appellant's activities were manufacturing, not design services, and thus not subject to service tax. The demand for service tax, along with interest and penalties, was set aside. The appeal was allowed, and the impugned order was overturned.