SERVICE TAX LIABILITY ON AN ACTIVITY TO COMPLY WITH STATUTORY REQUIREMENTS

[Mr. M. GOVINDARAJAN]

In ‘Commissioner of Central Excise, Indore V. Ankit Consultancy Limited’ – 2006 (10) TMI 61 - CESTAT, NEW DELHI the Tribunal held that services rendered for the preparation of voter identity card will not amount to ‘Business Auxiliary Service’ and liable to service tax, since it is the statutory obligation.

In ‘New Era Handling Agency V. Commissioner of Service Tax, Panaji, Goa’ – 2014 (11) TMI 277 - CESTAT MUMBAI the appellant is engaged in providing packaging activity services in relation to fertilizer manufactured by M/s Zuari Industries Limited, Goa, for which they are receiving certain consideration.  The Department was of the view that the activity undertaken by the appellant would come under the category of packaging services as defined under Section 65 (76b) of the Finance Act, 1994 and therefore they are liable to pay service tax.  Show cause notice was issued for the period from16.06.2005 to 31.03.2010 and adjudicated along with interest.   Equal amount of penalty was also imposed.   The appellant filed appeal before the Tribunal.

The Tribunal found that as per the Essential Commodities Act, 1955 read with Fertilizer Control Order, 1985, made it clear that fertilizer cannot be marketed without packaging in the manner specified in the said order.   As per clause 19 of the said order there are some restrictions on manufacture, sale and distribution of fertilizers that no person shall himself or by any other person on his behalf sell, offer to sell, stock or exhibit for sale or distribute-

• any fertilizer the container whereof is not packed and marketed in the manner laid down in the order;
• any fertilizer the label or container  where bears the name of any individual firm or company purporting to be manufacturer of the fertilizer, which individual firm, company is fictitious or does not exist.

Clause 21 of the said order provides that every manufacturer and pool handling agency shall in regard to packing and marking of containers of fertilizers comply with the requirements provided in that clause.

The Tribunal thus held that packaging of fertilizer is a statutory requirement for sale of fertilizer and will not attract the levy of service tax.   The Tribunal further found that the sale of fertilizer in bulk requires a license to sell in bulk.  As the appellant is not having such licence, therefore packaging is a statutory requirement for sale of fertilizers by M/s Zuari Industries Limited.   If marketing of fertilizer cannot take place without packaging, the appellant is a manufacturer as per Section 2(f)(i) of the Central Excise Act, 1944, wherein it is indicated that the manufacture includes any process incidental or ancillary to the completion of a manufactured final product.  In other words, the completion of fertilizer manufacture product occurs when packing is done and without packaging the fertilizer cannot be marketed.   Therefore the Tribunal held that the activity of the appellant in respect of fertilizer would form an integral part of manufacturing activity and cannot be said to be a service activity, especially in the context of packaging activity as defined in Section 65 (76b) which excludes from its scope  any activity of manufacture as defined in Section 2(f) of the Central Excise Act, 1944.

Against the said order of the Tribunal the Revenue filed appeal before Supreme Court.  The Supreme Court held that the Supreme Court did not see any ground to interfere with the judgment and order passed by CESTAT in this case.

In ‘Commissioner of Customs & Central Excise, Bhopal V. Smart Chip Limited’ – 2015 (7) TMI 886 - MADHYA PRADESH HIGH COURT a contract was entered into by the respondent assessee with the State of Madhya Pradesh on 09.10.2001 for carrying out various activities, details of which are indicated in the contract agreement.  The Revenue held that the same amounts to Business Auxiliary Services and confirmed the demand.   The Tribunal held that the activities do not amount to Business Auxiliary Service and not liable to service tax.   Against this order the Revenue filed appeal before the High Court.   The High Court held that the work done by the respondent assessee pertains to discharge statutory functions by the Department under Motor Vehicles Act and the same does not amount to customer care, promotion, marketing of services incidental or ancillary to the support services.   The High Court held that the service being rendered by the assessee for the Transport Department under the Motor Vehicles Act there is no error in the order passed by Tribunal warranting reconsideration.

The High Court further referred to the Circular No.89/7/2006 – Service Tax, dated 18.12.2006.   In that circular it has been indicated that Board is of the view that the activities performed by the sovereign/public authorities under the provision of law are in the nature of statutory obligations which are to be fulfilled in accordance with law. The fee collected by them for performing such activities is in the nature of compulsory levy as per the provisions of the relevant statute, and it is deposited into the Government treasury. Such activity is purely in public interest and it is undertaken as mandatory and statutory function. These are not in the nature of service to any particular individual for any consideration. Therefore, such an activity performed by a sovereign/public authority under the provisions of law does not constitute provision of taxable service to a person and, therefore, no service tax is leviable on such activities. 

The High Court dismissed the appeal filed by the Revenue.

Against the order of High Court the Revenue filed appeal before the Supreme Court in Civil Appeal No. 9901/2015.  The Supreme Court dismissed the appeal.

Since the Supreme Court dismissed the above said two cases it became finality and confirms the concept that service tax is not liable to be levied on an activity undertaken to comply with the statutory requirements.