By TIOL News Service

MUMBAI, AUG 12, 2014: THE brief facts of the case are that the appellants,engaged in the manufacture of P&P medicaments falling under Chapter Heading no. 30 of the CETA, 1985, have entered into manufacturing agreements with customers viz. M/s Lupin Lab, M/s Ranbaxy Lab, and M/s Polymed Health Care and as per agreement they are required to manufacture the goods out of raw materials and packing materials supplied by the customers and clear the same on payment of duty. During the process of manufacture, the customers required the appellant to make in-process analysis of semi-finished goods as well as final products so that the goods meet the Pharmacopoeia specifications as well as specifications provided by these customers. These activities are mainly statutory functions or checks required under the Drugs & Cosmetics Act and are undertaken to ensure that the products pass the specifications failing which the final products would be rejected.

Similarly, the stability studies are also carried out on the final products as a statutory requirement under the Drugs & Cosmetics Act as well as to ensure that the final products remain in stable conditions not only till the expiry of products but at least 6 months thereafter. Therefore, the study is conducted under accelerated conditions as well as on real time basis to ensure that the products meet the Pharmacopoeia requirements & remains stable beyond the shelf life of the products. Needless to mention the appellants have raised debit notes for recovery of these charges from the customers .

It is the Department's case that the assessee is liable to pay Service Tax on the above services under the category of "Technical Testing and Analysis Service" .

The Assistant Commissioner confirmed the Service Tax demand of Rs.3.11 lakhs together with interest and imposed penalties under section 76, 77 and 78 of the Finance Act, 1994. The Commissioner (A) while upholding the demand along with interest reduced the penalty to Rs.15,000/-.

Both, the appellant as well as the Revenue were unhappy with this order.

In their Stay application, the appellant submitted that the studies are necessary for carrying out the R&D work; testing of the product is essential in order to determine the quality of the developed work; the determination of nature of input to be used and the quantum of the same to be used in development is of important aspect of the whole provision of service; without the same, no product can be developed; that the R&D serv ice is taxable under Scientific or Technical Consultancy Service but is restricted when the services are provided by Science or Technology Institution or Organization which they are not and, therefore, they are not liable for payment of service tax under this category also.

The Bench observed that the issue is an arguable one and could be dealt with in detail at the time of the final hearing of the same. In fine, the CESTAT directed the applicant to pre-deposit a sum of Rs.75,000/- towards service tax and report compliance.

We reported this Stay order as 2009-TIOL-1491-CESTAT-MUM.

The appeal was heard recently along with the appeal filed by the Revenue.

The Bench after extracting the definitions of ‘testing and analysis service'& ‘taxable service' observed -

++ From the reading of the definitions provided under the Finance Act, the definition of ‘taxable service' is to any person, by a technical testing and analysis agency, in relation to technical testing and analysis. As the appellants are manufacturing the medicines as per the formulae developed by them or provided by the principal and during the manufacture, the appellants are undertaking certain test to find out whether the products are as per the formulae hence it cannot be said that the appellants are technical testing and analysis agency.

++ It is not the case of the Revenue that the appellants are only undertaking the activity of analysis and testing of product. From the impugned order passed by the Commissioner (Appeals), we find that verification was conducted through jurisdictional Superintendent and the jurisdictional Superintendent of the Range reported that the service under discussion relates to research and development activity and the appellants are not undertaking the testing and analysis activity separately.

Holding that there is merit in the contention of the appellant, the order of the lower authority was set aside and the appeal was allowed.

The Revenue appeal was dismissed as infructuous.

In passing : Now, the refund of pre-deposit and some s.4 valuation issue.

(See 2014-TIOL-1484-CESTAT-MUM)