Exemption Notification under Service Tax is a conditional notification and Section 5A (1A) of the Central Excise Act, 1944 is not applicable

/ Abott Law Office

In the matter of Commissioner of Central Excise v. Federal Mogul TPR (India) Limited [CEA No. 25/2012 and CEA Nos 26-28/2-12], the Hon’ble Karnataka High Court has held that exemption Notification [8 of 2005 dated March 01, 2015] under Service Tax is a conditional notification and Section 5A of the Central Excise Act is not applicable.

BACKGROUND:

  1. M/s Federal Mogul TPR (India) Limited (“FMTPR”) was inter alia engaged in manufacturing of Piston Rings etc., falling under Chapter 84 of the Central Excise Tariff Act, 1985 and registered with the Central Excise Department as a manufacturer.
  1. During the period from April 2007 to January 2008, FMTPR had sent Cenvat credit availed goods viz., Piston Rings in Coil form to their sister concern namely Federal Mogul Goetze India Ltd. (“FMGIL”) for chrome plating on job work basis under cover to material movement challans without reversing the Cenvat Credit availed thereon. FMGIL after undertaking the process on the goods returned the same to FMTPR under cover of an invoice on payment of Service Tax on the value of job work charges.
  1. FMTPR after undertaking various manufacturing processes cleared the same on payment of applicable excise duty and accordingly availed Cenvat Credit of the Service Tax so passed on by FMGIL.

DEPARTMENT’s CONTENTION

  1. The Department contended that the activity of chrome plating was covered under the category of ‘Business Auxiliary Service’ and liable for payment of Service Tax. However, in view of the Notification No. 8/2005-ST, dated March 1, 2005 the job work, which does not amount to manufacture was exempted from payment of Service Tax provided that the job worked goods are further used in the manufacture of final products on which appropriate duty of Excise is discharged by the principal manufacturer.
  1. The Department denied availment of Cenvat Credit to FMTPR, of the amount of Service Tax so paid by FMGIL on the ground that FMGIL being a job worker without availing the benefit of Exemption Notification No. 08/2005- March 01, 2005 had paid Service Tax and passed on the benefit of Cenvat Credit to FMTPR.
  1. The Authorities issued Show Cause Notices demanding inadmissible Cenvat Credit of Service Tax for the period from April 2007 to June 2008.

COMMISSIONER’s FINDING

  1. The SCNs were adjudicated by the Commissioner of Central Excise and confirmed the demand and also imposed a penalty of Rs 2 Lakh on the Managing Directors.

CESTAT’s DECISION

  1. M/s FMTPR being aggrieved by the order passed by the Commissioner preferred an appeal before the Hon’ble Tribunal. The Hon’ble Tribunal decided the matter in favour of M/s FMTPR by setting aside the demand.

DEPARTMENT’s APPEAL BEFORE THE HON’BLE HIGH COURT

  1. Being aggrieved, the Department preferred an appeal before the Hon’ble High Court of Karnataka contending that the Exemption Notification is unconditional and the provisions of Section 5A (1A) of the Central Excise Act, 1944 (“the Excise Act”) are applicable to the facts of the present case.

HELD:

  1. The Hon’ble High Court of Karnataka held as under:
  • The exemption Notification issued under Section 93 of the Finance Act is condition precedent. The applicability of the exemption Notification shall be subject to the condition stipulated therein i.e., the principal manufacturer discharging the liability of appropriate duty of Excise on the manufactured goods (para 10 of the judgment);
  • The words “shall not pay” enumerated in the Central Excise provision specifically denotes that it is the mandatory requirement on the manufacturer of such excisable goods not to pay the duty of excise on such goods in respect of which an exemption under Section has been granted absolutely. Mandatory requirement of “not to pay” the duty of Excise on goods exempted under Section 5(A)(1A) of the Excise Act is not found in Section 93 of the Finance Act (para 12 of the judgment);
  • Absence of Section 5A of the Excise Act in Section 83 of the Finance Act, indicates that the provisions of Section 5A of the Excise Act are not applicable to the Finance Act

Thus, the Hon’ble High Court held that the exemption Notification is a conditional Notification and Section 5A (1A) of the Excise Act is not applicable to the present case. Therefore, payment of Service Tax by job worker i.e. FMGIL and Cenvat Credit availed by principal manufacturer i.e. FMTPR was in order.

http://judgmenthck.kar.nic.in/judgmentsdsp/bitstream/123456789/60168/1/CEA25-12-01-04-2015.pdf

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