2025 (4) TMI 374 - AT - Service Tax

Nature of activity - service or manufacture? - embroidery of textile which is a separate decorative process rather than an intermediate textile processing step - exemption under Entry No.30(ii)(a) of the Mega Exemption N/N. 25/2012-ST - HELD THAT - The activity of embroidery carried on by the appellant has been held to be manufacture even by CBIC vide Letter dated 15th July 2011; the said letter clarified that embroidery work done on job work basis amounts to manufacture and does not fall within the purview of Business Auxiliary Service. Thus by relying upon the said letter issued by the Revenue the Commissioner of CGST Rohtak on identical facts in the matter of Shee Bankey Bihari Embroidery vide its OIO dated 29th July 2012 has held that the activity of embroidery amounts to manufacture and is not subject to service tax. In the present case the SCN was issued entirely based on the amount available in Form 26AS for the financial year 2015-16 and 2017-18 to levy service tax. It has been consistently held by the Tribunal and other Courts that service tax cannot be demanded merely on the basis of Form 26AS without examining and analyzing the activity carried on by the appellant. Further it has also been held by the Tribunal that the extended period cannot be invoked merely on the basis of difference in Form 26AS and ST-3 Returns. Conclusion - The embroidery is a manufacturing activity exempt from service tax and the demand based on Form 26AS and extended period invocation are unjustified. The impugned order set aside - Appeal allowed.

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment include:

Whether the activity of embroidery performed by the appellant qualifies as "manufacture" and thus falls outside the purview of service tax under Business Auxiliary Services (BAS).
Whether the embroidery activity is eligible for exemption under Entry No.30(ii)(a) of the Mega Exemption Notification No.25/2012-ST.
Whether the demand for service tax based on Form 26AS and the invocation of the extended period of limitation is sustainable.

ISSUE-WISE DETAILED ANALYSIS

1. Classification of Embroidery as Manufacture:

Relevant Legal Framework and Precedents: The definition of Business Auxiliary Services under Section 65 of the Finance Act, 1994, excludes activities that amount to manufacture of excisable goods. The Central Board of Indirect Taxes and Customs (CBIC) clarified in a letter dated 15th July 2011 that embroidery on a job work basis is considered manufacture under Chapter Heading 5810 of the Central Excise Tariff Act.
Court's Interpretation and Reasoning: The Tribunal relied on the CBIC's clarification and previous judgments, which held that activities classified as manufacture are not subject to service tax under BAS.
Key Evidence and Findings: The Tribunal noted the CBIC's letter and similar decisions in cases like Shee Bankey Bihari Embroidery, where embroidery was deemed manufacture and not subject to service tax.
Application of Law to Facts: The Tribunal applied the definition of manufacture and the CBIC's clarification to conclude that embroidery is a manufacturing activity and not subject to service tax.
Treatment of Competing Arguments: The Tribunal dismissed the Department's contention that embroidery is a distinct process not qualifying as manufacture, relying on established legal interpretations.
Conclusions: The Tribunal concluded that embroidery on a job work basis qualifies as manufacture and is not subject to service tax under BAS.

2. Exemption under Mega Exemption Notification:

Relevant Legal Framework and Precedents: Entry No.30(ii)(a) of the Mega Exemption Notification No.25/2012-ST exempts job work related to textile processing.
Court's Interpretation and Reasoning: The Tribunal interpreted "textile processing" broadly, including embroidery as part of the textile processing chain, based on precedents and dictionary definitions.
Key Evidence and Findings: The Tribunal cited decisions where embroidery was granted exemption under the Mega Exemption Notification.
Application of Law to Facts: The Tribunal applied the broad interpretation of textile processing to include embroidery, thus qualifying it for exemption.
Treatment of Competing Arguments: The Tribunal rejected the Department's narrow interpretation that excluded embroidery from textile processing, citing broader industry practices and legal precedents.
Conclusions: The Tribunal concluded that embroidery qualifies for exemption under the Mega Exemption Notification as part of textile processing.

3. Demand Based on Form 26AS and Extended Limitation:

Relevant Legal Framework and Precedents: Service tax demands must be based on clear identification of services rendered, not merely on financial discrepancies. The invocation of the extended period requires evidence of willful suppression or misrepresentation.
Court's Interpretation and Reasoning: The Tribunal held that demands based solely on Form 26AS without detailed examination of services are unsustainable. It emphasized the need for clear evidence of service provision and intent to evade tax for invoking the extended period.
Key Evidence and Findings: The Tribunal noted the lack of evidence tying Form 26AS discrepancies directly to taxable services and the absence of willful suppression.
Application of Law to Facts: The Tribunal found that the Department failed to provide sufficient evidence of service provision or intent to evade, making the demand and extended period invocation unjustified.
Treatment of Competing Arguments: The Tribunal dismissed the Department's reliance on Form 26AS as insufficient for establishing tax liability or justifying the extended period.
Conclusions: The Tribunal concluded that the demand based on Form 26AS and the invocation of the extended period were unsustainable.

SIGNIFICANT HOLDINGS

Preserve Verbatim Quotes of Crucial Legal Reasoning: "The definition of BAS as provided under Section 65(105)(zzb) read with Section 65(19) of the Finance Act, 1994, does not include any activity that amounts to manufacture of excisable goods."
Core Principles Established: Activities classified as manufacture are not subject to service tax under BAS. A broad interpretation of "textile processing" includes embroidery, qualifying it for exemption. Service tax demands require clear evidence of service provision, and extended periods require proof of willful suppression.
Final Determinations on Each Issue: The Tribunal set aside the impugned order, concluding that embroidery is a manufacturing activity exempt from service tax, and the demand based on Form 26AS and extended period invocation were unjustified.