If converting stand-alone trees into billets is manufacture than it is not liable for service tax

K. Parameswaran, Adv. for the Appellant. R. Gurunathan, AR for the Respondent.

ORDER

Smt. Archana Wadhwa, Judicial Member – All the appeals are being disposed of by a common order as the facts involved in each and every appeal are more or less identical. All the appellants are contractors of M/s Mysore Paper Mills Ltd. which is a State Govt. owned undertaking, engaged in the manufacture of various kinds of paper including newsprint. The said M/s Mysore Paper Mills Ltd. issued tender notifications calling for tenders from various contractors for the purpose of felling, conversion, debarking, collection, stacking, transportation and delivery of pulp wood from the captive plantation of the said M/s Mysore Paper Mills Ltd. As a result of such tender invitations, various contractors were appointed by the said M/s Mysore Paper Mills Ltd. for doing the above jobs. The appellants in the present appeals are all such contractors appointed by M/s Mysore Paper Mills Ltd for doing the above jobs which they have been doing right from 2002.

2. Revenue by entertaining a view that the activities undertaking by the appellants amounts to providing services under the category of business auxiliary services, raised demands of service tax against them by issue of various and separate show-cause notices to all of them invoking longer period of limitation. Appellants contested the said notices on the ground that the activity undertaken by them does not amount to providing of any service falling under the category of business auxiliary service. They contested that they are more or less in the nature of hired labour who cut the trees which belong to M/s Mysore Paper Mills Ltd., debark the same and further cut the same into smaller pieces for the purpose of transportation and transport the said pulp wood to the factory premises of M/s Mysore Paper Mills Ltd. They also contested the demand on the point of limitation. It was further submitted by the appellants that the contract awarded to them involved two separate activities- one for felling, debarking and cutting of the trees and the other for transportation of the goods. As regards transportation of the goods from the forest area to the factory of M/s Mysore Paper Mills Ltd., M/s Mysore Paper Mills Ltd has already discharged their service tax liability as a recipient of the GTA services. Accordingly, they submitted that department cannot again ask for confirmation of service tax by taking into consideration the cost of the said GTA service in the total cost of the contract. Appellant also pleaded that it is a bona fide case of interpretation of the provisions of law and if at all service tax is held liable to be paid by them, no penalty can be imposed upon them in terms of the provisions of Section 80 of the Finance Act 1994.

3. The above pleas of the appellants do not stand accepted by the original adjudicating authority who confirmed the demand as proposed in the notice and also imposed penalties upon the appellants. The said orders of the original adjudicating authority stand upheld by Commissioner (Appeals). Hence the present appeals.

4. In some of cases, Commissioner (Appeals) allowed benefit of the transportation aspect by observing that M/s Mysore Paper Mills Ltd has already discharged the service tax liability in respect of the very same service. Revenue has not filed any appeal against the said part of order of Commissioner (Appeals).

5. Learned advocate Shri K. Parameshwaran appearing for the appellants has drawn our attention to the definition of business auxiliary service as also to the fact that the activities undertaken by them cannot be held to be amounting to ‘processing of the goods’ inasmuch as, they simpliciter cut the trees and debark them and after further cuttings transported the same. In any case, he assails the impugned orders on the point of limitation and further submits that the definition of business auxiliary service itself excludes the activity if the same amounts to manufacture in terms of clause 2 of Section 2 (f) of the Central Excise Act. By drawing our attention to Chapter 44 of the Central Excise Tariff Act, he submits that inasmuch as there is a change in the name, character and use of the final product, which is different from the starting material, the activity may amount to manufacture, in which case it would be exempted from payment of duty of excise in terms of Notification No. 3/2005, dated 24.02.2005. Further, as the activity would amount to manufacture, no service tax liability would arise against them under the category of business auxiliary services.

6. Learned A.R. appearing for the Revenue, submits that in terms of the definition of business auxiliary service as provided in Clause 19 of Section 65 of the Finance Act production or processing of goods for or on behalf of client gets covered under the said definition inasmuch as the appellant was admittedly converting the stand-alone trees into billets ready for use in the pulp making, it has to be held that they have processed the goods for M/s Mysore Paper Mills Ltd. By drawing our attention to the tender notification (para 39), learned A.R. submits that it is not a simple case of felling and cutting of the trees but involved further conversion to pulp wood billets, which shall be done only by cross-cut saws to prevent wastage. Para 40 of the tender notification gives the length of pulp wood billets and if there is any deficiency in debarking, then debarking for such pulp wood delivered by the contractor, will be got done at Mill Yard at the risk and cost of the contractor. These facts clearly show that the appellants were not merely felling, cutting, and transporting the trees but was also converting the same into pulp wood billets of the specified sizes. As such he submits that the appellants have processed the wood and as such activity would admittedly fall under the definition of business auxiliary service.

As regards limitation, learned A.R. submits that the appellant never informed the department about the said activity and as such there is no occasion for the Revenue to take action against them. He also submits that the tender notification clearly lays down in para 84 that the service tax if any shall be borne by the company subject to the contractor complying with relevant provisions of service tax and rules thereunder. From this, he submits that the contractors were aware of their liability to pay service tax and by not taking the registration they have suppressed the same.

As regards confirmation of demand in respect of that part of the contract which belongs to transport, he fairly agrees that if M/s Mysore Paper Mills Ltd have paid tax as a recipient of the said service, confirmation of demand on that value may not be justified. He also fairly agrees that some of the impugned orders where the Commissioner (Appeals) has granted relief on the said issue stands accepted by the Revenue and do not stand appealed against.

7. After considering the submissions made by both sides we find that the definition of business auxiliary service underwent amendment with effect from 16.6.2004. As the period involved is subsequent to the said amendment, we have to take into consideration amended definition. The amended definition of the business auxiliary service reads as under:—

‘(19) “business auxiliary service” means any service in relation to

Explanation. – For the removal of doubts, it is hereby declared that for the purposes of this clause, –

In terms of Section 65 (19) (v), production or processing of goods for, or on behalf of the client is a service falling under the category of business auxiliary service. As such, we are required to examine as to whether the activities undertaken by the appellants for their client M/s Mysore Paper Mills Ltd would amount to processing of goods or not.

8. We have already enumerated the services which the appellants are required to undertake in terms of the tender notification as also the contracts. We agree with the learned A.R. that it is not a simple case of cutting of trees and then transporting the cut and debarked wood to the premises of their client. The appellants are required to convert the cut wood into billets of specific sizes, which sizes are fit for use in the pulp plant. The Hon’ble Supreme Court in the case ofSaraswathi Sugar Mills v. Haryana State Board AIR 1992 SC 224 has observed that whereas manufacture implies a change but every change is not manufacture and it is only when a different article emerges with a distinct name, character or use, it can be held to be the result of manufacture. As regards processing, Hon’ble Supreme Court observed that ‘processing essentially effectuates a change in form, contour, physical appearance or chemical combination or otherwise by artificial or natural means and in its more complicated form involves progressive action in performing, producing or making something. . . . . .’ As already observed by us that the appellants are required to deliver the wood to their client in the shape of billets of the specified dimensions, it has to be held that the cut wood has undergone changes.

9. Whether such changes amount to processing or amount to manufacture is another question required to be decided inasmuch as learned advocate appearing for the appellant has taken a categorical stand before us that the said activity would amount to manufacture in terms of the provisions of Section 2(F) of Central Excise Act. If that be so, they would be outside the purview of service tax liability under the category of business auxiliary service itself. He submits that if it amounts to manufacture, they shall be liable to pay duty of central excise which in any case would be ‘nil’ in terms of Notification No. 3/2005, dated 24.02.2005 as also applicability of the small scale exemption Notification No. 8/2003 would be required to be examined as most of the contacts are falling within the exemption limit. However, he fairly agrees that the said issue was never raised before the lower authorities and was never discussed or deliberated upon by them.

10. We have already expressed our views that the activities undertaken by them in any case amounts to processing. However, such an activity may amount to manufacture also as contested by the learned advocate. Inasmuch as the issue of manufacture was never raised before the authorities below, we deem it fit to set aside the impugned orders and remand the matters to the original adjudicating authority for the purpose of deciding on the said plea of the assessees. If the adjudicating authority comes to a conclusion that the activity does not amount to manufacture, the appellants would be liable to pay service tax under the category of business auxiliary service by holding that they have done processing of the goods for their clients.

11. Learned advocate has also challenged the impugned orders on the point of limitation. He agrees that in some cases, the demands are falling within the limitation period inasmuch as there were repeated show-cause notices to each and every contractor. The first show-cause notice was beyond the limitation period and thereafter periodical show-cause notices stand issued within the normal period.

12. As regards limitation, learned advocate apart from contending that the extended period of limitation can be invoked by the Revenue only in terms of provision of Section 73 which lays down certain circumstances for invocation of the same. The said circumstances, provided in the said section are identical to the proviso to Section 11A of the Central Excise Act which has been the subject matter of various decisions of the Higher Courts. It stands held that the extended period can be invoked only when there is a positive evidence indicating any mala fide or suppression or misstatement on the part of the assessee with an intent to evade payment of duty. He submits that the service tax being a new law at the relevant period was not clear and there was scope of entertaining a doubt about leviability of the same. In any case, he submits that the fact of such contracts having been awarded by M/s Mysore Paper Mills was in the knowledge of the Revenue. In support of the above contention he draws our attention to an order passed by the Dy Commissioner of Central Excise in respect of Mysore Paper Mills for refund of service tax paid on GTA services. We have seen the said order being order-in-original No. 1299/2008. It stands held in para 5 of the said order that:—

“I have gone through the records of this case and submissions made by the assessee during the Personal hearing. M/s MPM, Bhadravathi have placed work orders with different contractors for the extraction, collection, debarking, stacking along with transportation of acasia/eucalyptus pulp wood. The assessee has discharged the service tax liability on the cost of transportation of the pulp and has now approached the department for refund of the service tax paid on the transportation of the pulp on the ground that the work order is a composite contract and since they are not goods transport agency they are not liable to pay the service tax on the transportation of pulp.”

13. As such it is clear from above that the Revenue, though in the context of dispute involving the Mysore Paper Mills, was aware of the fact of placing work orders upon various contractors, for extraction collection, debarking stacking of the pulp wood. From this it becomes clear that there was no mala fide on the part of the contractors to suppress the fact of placement of work orders upon them. Otherwise also, we find that there is no evidence produced by the Revenue to reflect upon themala fides of the assessee. Number of contractors are involved and it cannot be presumed that all of them collided together to suppress the said fact of grant of work orders to them. Issuance of tender notifications and placement of work orders is a matter of record of M/s Mysore Paper Mills, in which case, it is difficult to accept that the same were suppressed by the present appellants. We further examine learned A.R.’s contention that in terms of the tender notifications it is clearly written that the service tax, if any, would be paid by the company subject to the contractors fulfilling the legal formalities. In fact we find that the said clause goes in favour of the assessee. The contract was not for a lump sum value inclusive of all the taxes and any taxes required to be paid by the contractors, including the service tax was to be reimbursed by the company. In such a scenario, we cannot find any mala fide motive on the part of the contractors not to pay the service tax.

In view of the foregoing discussion, we agree with the learned advocate that there was no justifiable occasion for the Revenue to invoke longer period of limitation. As the matters are being remanded to the original adjudicating authority for considering the aspect of manufacture, we direct him to examine each and every file separately and to limit the demands, if any, to the normal period.

13.1 Further, while calculating the demands if any, the value of transportation of goods will not be taken into consideration, if the appellants establishes that Mysore Paper Mills has discharged the service tax liability in respect of same as recipient of GTA services.

14. Learned advocate has also prayed for setting aside of the penalties upon the appellants by taking recourse to the provisions of Section 80 of the Finance Act 1994. We are of the view that the said Section would be fully applicable in respect of the demands made by invoking longer period. As we have already held that there was no mala fide on the part of the appellant, issue of imposition of penalties in respect of demands which are within the limitation period is left to the Assistant Commissioner for taking decision based upon the outcome of his decision on the directed issue and in the light of Section 80 of the Act.

15. All the appeals are disposed of in above manner.