2021 (1) TMI 179 - AT - Service Tax

Valuation - Business Auxiliary Service - inclusion of value of sizing in assessable value - Commissioner held that sized coal is an excisable product and sizing operation is an activity incidental and ancillary to the completion of a manufactured product and since the value of sizing is includible and has been included in the assessable value of coal sold to the customers - HELD THAT - Sizing of coal is an incidental and ancillary process to make coal marketable and thus complete manufacture of coal and to make it into excisable goods as per Section 2(d) of the Central Excise Act. The process of sizing of coal is also therefore outside Section 65(19) of the Act since it is a process in the manufacture of the final product, sized coal. It is also found from the records of the present proceedings that in respect of exactly the same work undertaken by ICML at the said mines, right from the beginning when central excise duty became payable, ICML has been paying central excise duty on the coal manufactured/produced in the mine, upon determination of assessable value/transaction value by including all expenses incurred, including sizing and transportation right up to the place of removal, as per the provisions of the Central Excise Act, for which it was duly registered under the provisions of the Central Excise Act with the jurisdictional Central Excise authorities. Returns under the Act have also been submitted by ICML, which have been finally assessed and differential duty, if any assessed, have also been paid by ICML. The proceedings under the said show cause notices have resulted in adjudication orders, passed by the Commissioner of Central Excise, Kolkata-I Commissionerate/Principal Commissioner of Central Excise, Kolkata-I, dated 16.12.2014, 14.10.2015 and 27.05.2016 respectively. There the stand of the Central Excise Department is that ICML is engaged in the manufacture of bituminous coal classifiable under Chapter Sub-Heading 27011200 of the First Schedule to the Central Excise Tariff Act, 1985, for which it is holder of central excise registration number, and that ICML had manufactured and cleared the said goods on payment of central excise duty computed on the assessable value/transaction value that included the base price, sizing charges, washing charges and transportation charges, but had not paid central excise duty by not including cesses/fees, royalty and stowing excise duty, resulting in short payment of excise duty payable of amounts confirmed by the respective adjudication orders. Even for the periods pertaining to years 2015-16, 2016-17 and 2017-18 (upto June 30, 2017) the assessments under the Central Excise provisions have been finalised by the jurisdictional proper officer and differential central excise duty, as finally assessed, along with interest, were demanded and paid by ICML. There are no infirmity with the impugned order of the Commissioner - appeal of the Revenue against the same has no merit - appeal dismissed.

Issues Involved:
1. Whether the sizing of coal constitutes "manufacture" under the Central Excise Act.
2. Whether the sizing of coal is a "Business Auxiliary Service" under the Finance Act, 1994.
3. Applicability of service tax on the sizing of coal.
4. Limitation period for the demand of service tax.

Issue-wise Detailed Analysis:

1. Whether the sizing of coal constitutes "manufacture" under the Central Excise Act:
The Tribunal examined the agreements between ICML and its customers, CESC Ltd. and Crescent Power Ltd., and determined that sizing of coal is an integral part of the coal manufacturing process. The Tribunal emphasized that the coal remains the property of ICML until it is delivered to the customers after sizing. The Tribunal noted that the Central Excise Act defines "manufacture" to include any process incidental or ancillary to the completion of a manufactured product. Therefore, sizing of coal, which is necessary to make the coal marketable, falls within the definition of "manufacture" under Section 2(f) of the Central Excise Act.

2. Whether the sizing of coal is a "Business Auxiliary Service" under the Finance Act, 1994:
The Tribunal held that the requirement for a service to be classified as a "Business Auxiliary Service" under Section 65(19) of the Finance Act, 1994, is that the goods must belong to the client, and the processing or production must be carried out on behalf of the client. In this case, the Tribunal found that the coal remains the property of ICML during the sizing process and is not processed on behalf of the clients, CESC or CPL. Therefore, the sizing of coal does not qualify as a "Business Auxiliary Service."

3. Applicability of service tax on the sizing of coal:
The Tribunal referred to previous decisions, including those in the cases of Mahanadi Coalfields Ltd., Northern Coalfields Ltd., and South Eastern Coalfields Ltd., which held that the activity of sizing coal is part of the manufacturing process and not a service. The Tribunal reiterated that if an activity amounts to "manufacture," it cannot be considered a service, as per the mutually exclusive nature of taxation under the Constitution. Consequently, the Tribunal concluded that service tax is not applicable to the sizing of coal.

4. Limitation period for the demand of service tax:
The Tribunal briefly noted that the demand for the period from 01.04.2007 to 31.03.2011 is barred by limitation. However, since the primary issue of whether the activity constitutes a service was resolved in favor of ICML, the limitation issue did not require extensive discussion.

Conclusion:
The Tribunal upheld the Commissioner's order, which had dropped the proceedings against ICML, and dismissed the Revenue's appeal. The Tribunal found that the sizing of coal is part of the manufacturing process, not a "Business Auxiliary Service," and therefore not subject to service tax. The Tribunal also emphasized the mutually exclusive nature of taxation under the Constitution, reinforcing that an activity classified as "manufacture" cannot simultaneously be treated as a service.

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