2024 (3) TMI 1043 - AT - Service Tax

Declared Service or not - agreement entered by the respondent-assessee with M/s. Syngenta India Limited for job work and were entitled to receive a variable costs and a fixed cost from M/s. Syngenta India Limited - falling under the categories of service agreeing to the obligation to refrain from an act or to tolerate an act or a situation or to do an act or not - clause (e) of Section 66E of the Finance Act 1994 - HELD THAT - On perusal of record as well as the agreement for job work it is found that the agreement is primarily for undertaking job work for manufacturing various pesticides and the payment schedule for both fixed as well as variable payment for manufacture of pesticides. It can be seen from the schedule produced that payment for the job work for manufacturing of various kinds of pesticides has two components firstly fixed charges per month of Rs. 16 Lacs and fixed charges up to 1500MT of per kg. basis at the rate of Rs. 5.7 per kg. for formulation and secondly for manufacturing of pesticides of above 1500MT variable rates has been given as provided - It can be seen that the agreement is primarily for manufacturing of pesticides by respondent-assessee on job work basis. The first category of the fixed charges which is at the rate of Rs. 16 Lacs per month is an integral part of the job work manufacturing charges i.e. primarily for the purpose of keeping the confidentiality of the formulation of the M/s. Syngenta India Limited and same cannot be considered separately from the job work agreement. The fixed cost which are being paid to the respondent-assessee do not fall under Declared Service category as mentioned under Section 66E(e) and the amount which is paid to the respondent-assessee is primarily for manufacturing cost undertaken by them on job work basis. It is an accepted legal position that the agreement has to be considered in its entirety for the purpose of levy of service tax since the agreement is primarily for undertaking job work for manufacturing various kinds of pesticides and therefore even if the payment for the job work is made in two types namely one as fixed and another is at variable cost this fact will not change the nature of the agreement and same is to be considered as job work manufacturing agreement - the department s stand that fixed component of the payment for the job work category under the declared service under Section 66E is not sustainable. The impugned order-in-original is legally sustainable - appeal is dismissed.

Summary

Issues Involved:
1. Classification of fixed cost reimbursement as taxable service u/s 66E(e) of the Finance Act, 1994.
2. Applicability of Service Tax on job work manufacturing charges.
3. Interpretation of the Toll Formulation Agreement and its implications on service tax liability.

Summary:

1. Classification of Fixed Cost Reimbursement as Taxable Service u/s 66E(e) of the Finance Act, 1994:
The department argued that the fixed cost reimbursement received by the respondent-assessee from M/s. Syngenta India Limited for not producing goods for other parties falls under the taxable service category u/s 66E(e) of the Finance Act, 1994, which includes "agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act." The show cause notices were issued based on this premise, but the Commissioner dropped the proceedings, stating that the fixed cost was part of the job work charges and not an independent service.

2. Applicability of Service Tax on Job Work Manufacturing Charges:
The Commissioner referenced the case of Jubilant Industries Ltd. v. CCE, which held that manufacturing activities subject to excise duty cannot simultaneously be subjected to service tax. The agreement between the respondent-assessee and M/s. Syngenta India Limited was primarily for manufacturing pesticides on a job work basis, with charges split into fixed and variable components. The Commissioner concluded that the fixed cost was integral to the manufacturing process and not a separate service.

3. Interpretation of the Toll Formulation Agreement and Its Implications on Service Tax Liability:
The Tribunal reviewed the Toll Formulation Agreement, which stipulated that the respondent-assessee would not use its plant and machinery for any other party. The fixed cost was deemed part of the job work manufacturing charges, ensuring confidentiality and covering unutilized plant capacity. The Tribunal upheld the Commissioner's view that the fixed cost did not fall under the Declared Service category u/s 66E(e) and was part of the manufacturing cost.

Conclusion:
The Tribunal dismissed the department's appeal, affirming that the fixed cost reimbursement was part of the manufacturing charges and not a separate taxable service. The impugned order-in-original was deemed legally sustainable.