2019 (1) TMI 1119 - AT - Service Tax

Demand of service tax - job work - change of the valuation under Central Excise to MRP based valuation - manufacture of pharmaceuticals - inclusion of testing charges in assessable value - extended period of limitation - Held that - As long as the pharmaceuticals were not under MRP based valuation, the excise duty was paid by the appellant reckoning the processing charges including the testing and analysis charges. Since, the pharmaceuticals are now under MRP based valuation, the amounts which they received under the two heads is irrelevant. The question is whether because of change of the valuation under Central Excise to MRP based valuation, the activity of testing and analysis which was hitherto considered by the appellant as a part of their manufacturing costs and which has not been disputed by the department becomes a distinct service rendered to their principals. We find it difficult to hold such a view - The testing and analysis is not a distinct separate service being offered by the appellant to their principals but it is a part and parcel of the manufacturing process. Unless such testing including stability tests and validation tests are conducted the product cannot be marketed at all. Therefore, no service tax can be leviable separately on this component of the processing charges which they received. On identical facts in the case of Midas Care Pharmaceuticals Pvt Ltd 2014 (8) TMI 743 - CESTAT MUMBAI , the Tribunal-Mumbai held that no service tax can be levied under testing and analysis charges where the pharmaceuticals are tested by the appellant after being manufactured as a job work. Appeal allowed - decided in favor of appellant.

Issues:
- Whether the testing and analysis charges received by the appellant are liable to service tax.
- Whether the longer period of limitation for demand is sustainable.
- Whether the imposition of penalty under Sec.78 is sustainable.
- Whether interest is chargeable on the tax amount.

Analysis:
1. Testing and Analysis Charges:
The appellant, a manufacturing company, conducted testing and analysis on pharmaceuticals as part of the manufacturing process. The appellant argued that since they were paid separately for testing charges in addition to job work charges, the testing was integral for marketing the product and not a distinct service. The department contended that since the appellant was paid separately for testing, it constituted a service rendered to their principals. The Tribunal found that testing and analysis were essential parts of the manufacturing process, and no service tax could be levied separately on these charges. Citing a similar case, the Tribunal held that no service tax could be levied on testing and analysis charges. The impugned order was set aside, and the appeal was allowed.

2. Longer Period of Limitation:
The appellant argued that the longer period of limitation for the demand was not sustainable as there was no fraud or suppression of facts. They contended that the department was aware of their operations, and the demand for the period from January 2006 to March 2008 was beyond the permissible limit. The Tribunal agreed with the appellant, stating that the extended period of penalty was not sustainable due to the department's knowledge of the matter throughout the relevant period.

3. Imposition of Penalty:
The appellant challenged the imposition of penalty under Sec.78, arguing that there was no fraud or suppression of facts. The Tribunal did not delve into this issue in detail in the judgment, but it can be inferred that since the impugned order was set aside, the penalty under Sec.78 was also likely to be deemed unsustainable.

4. Chargeability of Interest:
The appellant contended that no interest should be chargeable since the tax itself was not leviable in the first place. However, the judgment did not explicitly address the issue of interest chargeability. It can be inferred that since the appeal was allowed and the impugned order set aside, interest chargeability might have been deemed irrelevant.

In conclusion, the Tribunal ruled in favor of the appellant, setting aside the impugned order and allowing the appeal based on the finding that the testing and analysis charges were not liable to service tax as they were integral to the manufacturing process. The issues of longer period of limitation, penalty imposition, and interest chargeability were not extensively discussed in the judgment but were likely considered in the overall decision to set aside the order.

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