2023 (11) TMI 555 - AT - Central Excise

Levy of Excise Duty - footwear items falling under Chapter 64 from various vendors were sold after affixing their brand name Fab India without payment of duty - levy of service tax on the penalty amount. Whether the activity conducted by the assessee was chargeable to Central Excise duty? - HELD THAT - The law on the issue is well settled that excise duty is on the manufacture of goods and the liability to pay is on the manufacturer. In terms of the definition of 'manufacture' as provided in section 2 (f) of the Act, a person who undertakes any of the activities specified therein is a manufacturer and as interpreted, a job worker engaged in any of the said activities is liable to pay duty on the goods manufactured by him unless exempted. Consequently, by virtue of the Notification No 214/86 dated 15.3.1986, the liability of the job worker to pay excise duty is passed on to the principal manufacturer subject to the condition that the principal manufacturer gives a declaration/ undertaking to pay the duty. The authorities below have erred in observing that in terms of the definition of manufacture under section 2 (f)(iii) of Central Excise Act, the appellant appears to be involved in 'deemed manufacture' and thereby liable to pay excise duty - reference made to the decision of the Larger Bench of this Tribunal in MAYO INDIA LTD. VERSUS COMMISSIONER OF C. EX., AURANGABAD 1999 (3) TMI 636 - CEGAT NEW DELHI , where the appellant entered into agreement for manufacture of medicine as per their specifications, requirement and bearing their trademark and brand name for which they supplied the raw material. The learned Counsel for the appellant has alternatively relied on the Notification No. 214/86-CE dated 25.3.1986 to say that incidental activity of manufacture carried out by vendors on behalf of the appellant was as job workers then the liability has to be on the job worker and the appellant cannot be made liable to pay the duty - it is felt that no reliance can be placed on the notification since the raw material supplied by the appellant was not under the provisions of the notification. Whether the penalties recovered by the assessee from the vendors were chargeable to service tax? - HELD THAT - A perusal of the contents of the agreement executed by the appellant with their vendors does not show that the agreement is for providing any services for which any consideration has to be paid and as noticed in M/S SOUTH EASTERN COALFIELDS LTD. VERSUS COMMISSIONER OF CENTRAL EXCISE AND SERVICE TAX, RAIPUR 2020 (12) TMI 912 - CESTAT NEW DELHI the contract may provide for penalty provisions for breach of the terms of the contract but that would not make the same consideration for a contract as has been noted, that there is a mark distinction between condition of a contract and consideration for a contract - The present case is squarely covered by the aforesaid decisions of the Tribunal and in that view no liability of Service Tax under Section 66E(e) can be fastened on the appellant. The learned Counsel for the appellant has referred to Circular No. 178/10/2022-GST dated 3.08.2022 whereby it has been clarified that any penalty or compensation received for any loss or damage caused by breach or non performance of the terms of the contract is not by way of consideration for any independent activity rather the same is in the course of performance of the contract, hence not taxable under the GST regime including the erstwhile serves tax regime - The controversy for levy of service tax on the penalty amount received by the appellant gets resolved in favour of the appellant also by virtue of the said Circular. The impugned order set aside - appeal allowed.

Summary

Issues Involved:
1. Whether the activity conducted by the assessee was chargeable to Central Excise duty.
2. Whether the penalties recovered by the assessee from the vendors were chargeable to service tax.

Comprehensive Summary:

Issue 1: Central Excise Duty Liability
The appellant, engaged in the manufacturing of readymade garments and made-up articles of textile, was found during an audit to have sold footwear items under their brand name "Fab India" without paying excise duty. The Adjudicating Authority concluded that affixing labels, MRP tags, and barcodes amounted to 'deemed manufacture' under Section 2(f)(iii) of the Central Excise Act, thus making the appellant liable to pay excise duty. However, the Tribunal observed that the entire manufacturing activity was conducted by the vendors, and the appellant was only involved in trading. Citing various decisions, including Mayo India Ltd. vs. Commissioner of C. Ex. Aurangabad and Burman Laboratories Ltd. vs. Commissioner of Central Excise, Indore, the Tribunal concluded that the appellant was not the manufacturer and hence not liable for excise duty. The Tribunal emphasized that the mere provision of raw materials and specifications does not make the appellant the manufacturer; the actual manufacturing was done by the vendors.

Issue 2: Service Tax on Penalties
The appellant had received penalties from vendors for not meeting contract terms, which the Adjudicating Authority deemed taxable under Section 66E(e) of the Finance Act, 1994, as it considered the penalties a form of consideration for tolerating a breach of contract. The Tribunal, however, referred to decisions such as South Eastern Coalfields Ltd. vs. Commissioner of Central Excise and Service Tax, Raipur, and Steel Authority of India Ltd. vs. Commissioner of GST & Central Excise, Salem, to conclude that penalties do not constitute consideration for any independent activity. The Tribunal noted that penalties are meant to safeguard commercial interests and are not intended as consideration for tolerating a breach. The Tribunal also referenced Circular No. 178/10/2022-GST, which clarified that penalties for breach of contract are not taxable as they do not constitute consideration for any service.

Conclusion:
The Tribunal set aside the demands for both excise duty and service tax, along with the consequential interest and penalties, thereby allowing the appeal. The judgment emphasized that the appellant was not the manufacturer of the goods in question and that penalties received were not taxable under service tax provisions.