By TIOL News Service

BANGALORE, OCT 10, 2013: THE appellant is engaged in the manufacture of various electric and electronic goods. Besides undertaking manufacture on their account, they have also undertaken electroplating of connector components for M/s. Tyco Electronic Corporation India Pvt. Ltd. Job work consists of electroplating of goods supplied by M/s. Tyco Electronic with silver or gold. The appellant was availing the benefit of Notification No.8/2005 on the ground that they are engaged in the manufacture of these goods and they were supplying the same to M/s. Tyco Electronic. However, the department took a view that the appellant should have discharged service tax on the electroplating cost including the cost of electroplating materials used by the appellant. After completion of proceedings, service tax of Rs.2,82,39,803/- with interest for the period from 1.11.2007 to 31.5.2011 has been demanded and penalty has also been imposed under Finance Act, 1994.

The Counsel for the appellant submits that: the contentions of the revenue that the process does not amount to manufacture and therefore the activity undertaken by the appellant has to be classified as a service under ‘business auxiliary service' and service tax should be levied is not correct; that electroplating of electrical contacts on job work basis is a process incidental or ancillary to the completion of manufacture and amounts to manufacture. He relies on the section-note 6 to Section 16 of the Schedule to the Central Excise Tariff Act to submit that conversion of an article which is incomplete or unfinished but having the essential character of the complete or finished article, shall amount to manufacture and also he submits that the process undertaken by the appellant amounts to manufacture. He submits that the process undertaken by the manufacturer in this case impart special qualities which are not existing in the raw material supplied and they acquire a totally different character and also it amounts to completion or finishing of the incomplete product. Further, he also submits that the stand of the department that appellant is liable to pay service tax in view of the fact that the product supplied by them to M/s. Tyco Electronics, which is a 100% EOU is eligible for exemption under Notification No.24/2003 CE dated 31.3.2003, the appellant is not eligible for exemption under Notification No.8/2005 ST dated 1.3.2003 is not correct since Notification No.24/2003 does not provide unconditional exemption to the products manufactured by a 100% EOU. He also submits that even if the above two submissions are of no help, they have a strong case on limitation also. Further he also submits that appellant has paid VAT on 75% of the electroplating cost and therefore even on valuation, the service tax is payable only to the extent of 25%.

The AR for the Department submits that the process undertaken by the appellant does not amount to manufacture and therefore the impugned order is sustainable on this ground alone. Further, he reiterates the observation of the Commissioner that appellant is not eligible for the benefit of Notification No.8/2005 since the products supplied to 100% EOU after undergoing process are exempt from payment of duty.

The Tribunal noted the fact that according to section-note to Section 16 of the Central Excise Tariff, conversion of an article which is incomplete or unfinished but having the essential character of the complete or finished article (including ‘blank', that is an article, not ready for direct use, having the approximate shape or outline of the finished article or part, and which can only be used, other than in exceptional cases, for completion into a finished article or a part), into complete or finished article shall amount to ‘manufacture' .

Further even before this section-note was introduced, this Tribunal had considered the issue as to whether electroplating amounts to manufacture or not and the Tribunal taking note of the decision of the Supreme Court in the case of TISCO vs. UOI: had held that electroplating would amount to manufacture.

So, the Tribunal held that the process undertaken by the appellant amounts to manufacture and therefore they are not liable to pay service tax in view of the specific exclusion in the definition of ‘business auxiliary service' which provides that if the process amounts to manufacture, no service tax would be liable to be paid.

The Tribunal further observed,

Even though the issue can be decided on the sole ground whether the process amounts to manufacture or not, we would like to consider applicability of the second ground viz., exemption under Notification No.8/2005-ST also, which provides for exemption from service tax to the goods produced on behalf of the client provided such exemption is allowed only when such goods are used by the principal manufacturer or further manufacture of other goods on which appropriate duty of excise is payable. The Notification also defines ‘appropriate duty of excise'. According to the Notification, ‘appropriate duty of excise', shall not include ‘nil' rate of duty or duty of excise wholly exempt. We find ourselves in agreement with the submission that the Notification when read with the ‘appropriate duty of excise' would mean that only when the goods manufactured by the principal manufacturer attract ‘nil' rate of duty as per tariff or unconditional full exemption, the benefit of Notification No.8/2005 is denied. In this case, the 100% EOU viz., M/s. Tyco Electronics to whom the appellants have supplied the goods on job work basis is eligible for exemption Notification No.24/2003-CE dated 31.3.2003. It is the stand of the department that this notification exempts 100% EOU from payment of duty and therefore the appellant is not eligible for the benefit of Notification No.8/2005-ST. We find that Notification No.24/2003-CE dated 31.3.2003 has a proviso which reads as under:

"Provided that the exemption contained in this notification in respect of duty of excise leviable under Section 3 of said Central Excise Act shall not apply to such goods if brought to any other place in India."

This clearly shows that this is not an unconditional exemption notification. Exemption is available only if the goods are not brought to any other place in India. Since exemption under Notification No.24/2003 is not an unconditional exemption, we find that the appellant has a case for eligibility for exemption under Notification No.8/2005 also even if it is assumed that the process does not amount to manufacture.

Since Tribunal found that the appellant has made out a case on merits on both the grounds as discussed above, it did not consider it necessary to consider the issue relating to limitation, penalty, etc.