Custom, Excise & Service Tax Tribunal
Espi Indsutries And Chemicals Pvt Ltd vs Hyderabad-Iii on 21 January, 2019
(1)
Appeal No: ST/2218/2010
CUSTOMS, EXCISE AND SERVICE TAX APPELLATE TRIBUNAL
REGIONAL BENCH AT HYDERABAD
Division Bench
Court - I
Appeal No. ST/2218/2010
(Arising out of Order-in-Appeal No.15/2010 (H-III) ST dated 22.06.2010 passed by
CCCE & ST (Appeals-III), Hyderabad)
ESPI Industries & Chemicals Pvt Ltd ..... Appellant(s)
Vs.
CCCE & ST, Hyderabad - III ..... Respondent(s)
Appearance Shri G. Prahlad & Ms. Swetha, Advocates for the Appellant. Shri A.V.L.N. Chary, Superintendent/AR for the Respondent. Coram:
HON'BLE Mr. M.V.Ravindran, MEMBER (JUDICIAL) HON'BLE Mr. P. Venkata Subba Rao, MEMBER (TECHNICAL) Date of Hearing: 10.01.2019 Date of Decision: 21.01.2019 FINAL ORDER No. A/30104/2019 [Order per: P.V. Subba Rao.]
1. This appeal is filed against Order-in-Appeal No. 15/2010 (H-III) ST dated 22.06.2010.
2. The facts of the case in brief are that the appellant is a manufacturing company engaged in manufacture of pharmaceuticals on their own as also on job work basis for various principals. The goods are cleared from the appellant's premises by their principals. After manufacturing, the appellant is also required to conduct certain tests such as validation and stability analysis tests as per the directions of the principal manufacturers on the products to ensure that they meet the specifications. Thereafter, the appellants are required to provide Certificates that the products are as per the specifications. The appellant is getting paid by their principals for the job work which they undertake. Additionally, the appellant gets paid separately (2) Appeal No: ST/2218/2010 testing charges for the tests which they conduct on the pharmaceuticals before clearing them. The appellant used to pay excise duty under Sec.4 of Central Excise Act including the amounts which they received as testing charges because these also form part of the assessable value of the goods.
From 01.07.2005, these products have been notified under Sec.4A and the duty has to be paid on the basis of MRP of the product and the cost of manufacture etc., are immaterial. They have been paying the duty accordingly. Since the excise duty is based on MRP, the question of adding either the job work charges or the testing charges which they received from their principals does not arise. A show cause notice was issued to the appellant in this background demanding service tax holding that the tests which they conducted on the products is a service of 'technical testing and analysis' which they have rendered to their principals and is liable to service tax. After following due process, the Asst. Commissioner confirmed the demand along with interest and imposed penalties. Aggrieved, the appellant appealed before the first appellate authority who, vide the impugned order, upheld the order of the lower authority and rejected the appeal. Hence, this appeal on the following grounds.
(1) Excise Duty is discharged on the final products including the cost of testing charges and hence there cannot be another demand of service tax on the same amount.
(2) Even if the testing is rendered as a separate service, it could at best be treated as self service because they were testing their own products.
(3) The longer period of limitation is not sustainable and the demand is for period January, 2006 to March, 2008 and the show cause notice was issued on 04.05.2009 invoking extended period of limitation (3) Appeal No: ST/2218/2010 under Sec.73(1) of the Act. There was no fraud, wilful misstatement, collusion or suppression of facts and the department was fully aware of the mode of their operations. The initial letter of the department asking them to pay service tax towards testing charges was dated 14.12.2005 and the response on 27.12.2005. This was followed by a series of correspondence and then an audit note on 08.09.2008. Final show cause notice was issued on 04.05.2009. This would show that entire matter was fully within the knowledge of the department at all relevant time. Therefore, extended period of penalty is not sustainable.
(4) The imposition of penalty in terms of Sec.78 is not sustainable because there was no fraud, mis-declaration or suppression of facts.
(5) No interest is chargeable because the tax itself is not leviable in the first place.
3. Learned counsel for the appellant reiterates the above submissions and forcefully argued that the technical testing and analysis must have been rendered to some other entity as a separate service for it to be charged to service tax. In this case, they were testing their own products as per the directions of the principals. Although they were getting paid separately for testing charges in addition to the job work charges, the testing is an essential element for the product to be marketed. Without testing, the product cannot be marketed and no excise duty would have been leviable. In fact, the product itself could not have been legally sold without testing process. Therefore, the testing and analysis are integral part of the manufacturing process although they get paid in two components by their principals. As long as their products were not under MRP based valuation, (4) Appeal No: ST/2218/2010 they were discharging duty on the full assessable value including the testing and analysis charges. The department never objected to inclusion of the testing charges at that time in the assessable value of the products. Merely because the mode of valuation of the final product has changed to MRP bases valuation, the testing part of their activity does not become a separate taxable service. She relies on the case law of Tribunal-Chennai in the case of Tamil Nadu Water Supply and Drainage Board, Madurai in Appeal No. ST/CO/023/2011 and ST/434/2011 holding that testing of water which was an essential part of the contract cannot be treated as a separate service rendered by the appellant. She also relied on the case of Midas Care Pharmaceuticals Pvt Ltd [2015 (37) STR 346 (Tri-Mumbai)] in which a pharmaceutical company which was doing testing and analysis of the products was held not liable to pay service tax as these were not separate activities but were part of the products which they manufacture. She also relies on the CBEC circular 334/1/2008-TRU dated 29.02.2008 in which it was clarified in Para 3.2 that "for the purpose of classification of a service covering a number of separate services, a view has to be taken as to whether an individual service is merely a component of overall supply or is itself a distinct and independent supply that is whether the component is merely ancillary to the principle supply or the component can be considered as a separate taxable service in its own right. A service which does not constitute for a customer an aim in itself but a means of better enjoying to principle supply is considered as a supply ancillary to the principle supply". Thus, she argues that the services which they have rendered viz., testing and analysis are part of their manufacturing activity itself and they were getting paid by the principal for the same in two components i.e., one for the conversion of the product and second for testing and analysis. (5)
Appeal No: ST/2218/2010 Therefore, they cannot be charged service tax under testing and analysis services.
4. Learned departmental representative reiterates the findings of the lower authorities and argues that the testing an analysis is being rendered in addition to their manufacturing and that is the reason the appellant is getting paid separately for this service by the principals. If it had been a component of the manufacture itself, they would not have been paid separately for the same. Further, the service also cannot be considered as self service because if it is self service somebody else will not pay for the same. In this case, they are getting paid by their principals and therefore, it is a service which they are rendering to them. He prays that the appeal may be rejected.
5. We have considered the arguments on both sides and perused the records. We find that there is no dispute on the facts of the case. The appellant is manufacturing pharmaceutical products as loan licensee for their principals and were getting paid the processing charges. The pharmaceuticals so produced are being cleared directly from the assessee's premises by the principals for further distribution. Pharmaceuticals, by their very nature, require testing before they can be sold in the market. It is not in dispute that the appellant is conducting such tests only before releasing the goods into the market. However, they are getting paid separately for this testing and analysis and separately for job work. 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 (6) Appeal No: ST/2218/2010 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 (supra), 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. Respectfully, we follow the ratio of this decision. In view of the above, we find that the impugned order is liable to be set aside and we do so.
6. The impugned order is set aside and the appeal is allowed.
(Pronounced in the Open Court on 21.01.2019)
(P.VENKATA SUBBA RAO) (M.V. RAVINDRAN)
MEMBER (TECHNICAL) MEMBER (JUDICIAL)
Veda