Brief Facts of the Case s9

Brief facts of the case:-

M/s. Deep Industries Limited, 6th Floor, Astron Tower, Opp Fun-Republic Cinema, S. G. Highway, Ahmedabad – 15 (here-in-after referred to as M/s Deep) is engaged in providing services falling under the categories of (1) Mining Services (zzzy) and (2) Transport of Goods by Road (zzp) and are for the same registered with Service Tax Commissionerate having Service Tax registration No. AAACD6915EST001.

2. During the course of audit of the records for the period 2010-11 by the Internal Audit Party of Service Tax Commissionerate of M/s Deep, it was noticed that the M/s Deep was providing services in relation to compression of Natural Gas at the premises of M/s. Gujarat Alkalies & Chemicals Ltd (herein after referred to as “GACL”). The activity of compression of Natural Gas was covered under the category of Business Auxiliary Service but exempted vide Notification No. 8/2005-ST dated 01-03-2005. Accordingly, M/s Deep was availing exemption from payment of service tax.

2.1. It was further revealed that M/s GACL for compression of Natural Gas at Power Plant, GACL, Dahej, invited bids from various service providers vide Tender Enquiry No. GACL/GM(D)/2003-2004 dated 01.05.2003. M/s GACL awarded M/s Deep Industries Ltd the Contract for the Work of compression of natural gas vide its LOI dated 08.05.2003 and a contract dated 20.02.2004 was made.

3. Perusal of the above contract revealed that under the head “Scope of Work & Technical Specification” following provisions were laid down:

13.1 In order to ensure supply of low pressure natural gas to gas turbines, the low pressure natural gas available at GACL, Dahej is to be compressed. 13.2 Compression Capacity: The low pressure natural gas available at GACL, Dahej is required to be compressed and delivered at the battery limit as under: Inlet pressure (at B/L) : 0.5-1.5 kg/cm2g. Outlet pressure (at B/L) : 20.0-22.0 kg/cm2g. Compression capacity required : 35,000 sm3/day. (Contracted Quantity of Gas) Max/Minimum contracted quantity : 35,000/20,000 sm3/day (Based on monthly basis) 13.4 The LP gas composition is typical and is subject to variation. Inlet pressure at battery limit : 0.5-1.5 kg/cm2g. Inlet temperature (rated/max/min) : 35/45/40 deg.C Compression capacity required (max) : 60,000 sm3/day Outlet temperature (maximum) : Ambient +20deg.F. Outlet pressure : 20.0 to 22.0 kg/cm2g. The outlet pressure would depend on the off take by the gas turbines form the pipeline. However, the compressor should be rated for discharge pressure of 23 kg/cm2g. 14.0 The contractor is required to compress the natural gas available from top outlet of LP separators and deliver the compressed natural gas at the specified conditions at one point in GACL’s pipeline by providing all necessary facilities, equipments, manpower, consumables, lubricants, spare parts etc. The Contractor’s scope of work encompasses total engineering, supply, transportation, installation, construction, commissioning, operation and maintenance of suitable compressor plant completion all respect on charter hire basis. Contractor’s scope of work shall include all civil/structural /mechanical/ piping/ instrumentation/ electrical works for the compressor plant including but not limited to the following: 14.1 Site development including site grading, approach roads, footpaths, storm water drains, etc. 14.2 Cabin/shed/ room alongwith toilets etc. for Contractor’s personnel/ 1 operators. 14.3 Store room for consumables, lubricants, chemicals, spare parts, tool and tackles, etc. 14.4 Shed/ room for consumables, lubricants, chemicals, spare parts, tool & tackles, etc. 14.5 Supply/ transportation/ installation of all equipments, instruments, including skid mounted compressor packages with driver, auxiliary equipments/ items such as filters, intercoolers, separators, scrubbers etc., piping, pressure vessels, instruments and control systems, electrical items etc. 14.6 Supply/ transportation/ installation of fuel gas conditioning system including knock out drum, pressure reducing control valves, etc. 14.7 Hook up and termination of inlet gas line, outlet gas line, condensate/ oil return line; flare line at the battery limit. 14.8 Metering facilities for 14.8.1 Outlet gas line. 14.8.2 Electric power. 14.9 Electric power for emergency lighting etc., as required, will have to be arranged by the Bidder. 14.10 Area lighting and illumination including provision of lighting distribution borad and termination and laying of cables up to junction box by GACL. Balance distribution by M/s Deep. 14.11 Provision of suitable capacity control system ensuring no fall in inlet pressure of gas due to excess withdrawal of natural gas. 14.12 Suitable condensate handling system for return of condensate at specified pressure at the battery limit. The collected condensate drums are to be shifted/stored in central stores of GACL. 14.13 Instrument air and cooling water will be given by GACL. 14.14 Uninterrupted instrument power supply and instrument air supply, as necessary will have to be arranged by Contractor at his own cost. 14.15 Disposal of flared/vent gas in the flare gas header to be hooked upto GACL’s existing flare header. 14.16 Successful commissioning of the compressor plant. 14.17 Operation and maintenance of the compressor plant including supply of trained manpower, all consumables, chemicals lubricants, spare parts, etc. 14.18 Maintaining sufficient inventory of spare parts for smooth and continuous operation of the plant. 14.19 Obtaining statutory approvals including the DGMs approval and performing work in accordance with such approvals. 14.20 Providing adequate fire fighting equipments viz. fire extinguishers, sand buckets, portable trolleys etc. 14.21 Making all necessary arrangements for lodging, boarding and transportation of Contractor’s personnel. 14.22 Dismantling and demobilization of the compressor plant after completion of Contract. 14.23 Any other items/ work/ services not specifically listed above but required for safe, reliable and desired operation of the compressor plant and delivering the compressed natural gas at the specified conditions.

3.1 A plain reading of the above provisions revealed that: * in order to ensure supply of low pressure natural gas to gas turbines, the low pressure natural gas available at GACL, Dahej was to be compressed and to accomplish this task, M/s GACL appointed M/s Deep . * M/s. Deep was required to compress the natural gas available from top outlet of LP separators and deliver the compressed natural gas at the specified conditions at one point in GACL’s pipeline by providing all necessary facilities, equipments, manpower, consumables, lubricants, spare parts etc. * The compressed natural gas that is supposed to be delivered by M/s Deep at GACL should be at 20.0 to 22.0 kg/cm2g. For the said process of compression of natural gas, M/s Deep Industries Ltd. is providing all necessary facilities, equipments, manpower, consumables, lubricants, spares parts etc.

2 4 The Board vide letter F.No. B.1/3/2001-TRU dated 21.05.2001 has issued clarification regarding compression of Natural Gas. The relevant contents of the Circular are reproduced below: “ I am directed to say that, as you aware, excise duty was imposed on Compressed Natural Gas (CNG) @ 8% (50% of CENVAT rate of 16%) w.e.f. 1st March, 2001. In this context, it has been reported that Natural Gas coming out of Oil Wells is compressed at the compressor stations only to boost up the flow of gas in the pipeline. The pressure of the natural gas at this stage is much less than the pressure, which is applied to convert natural gas into Compressed Natural Gas for sale. The pressure of the gas when it is compressed as CNG is around 200-250 Kg/Cm2 as against a low pressure of the order of 50-90 Kg/Cm2 only, which is required for the flow and movement of the natural gas through the pipe line. Doubts have been raised whether the natural gas, which is subjected to lower pressure only for movement of the gas through the pipeline, is also to be subjected to excise duty as Compressed Natural Gas. 2. It may be clarified that the excise duty applies to Compressed Natural Gas only. Exemption from excise duty has been provided to natural gas. As such, it is only when natural gas is converted into Compressed natural Gas, which is the product marketed and sold for automobile fuel that the duty liability arises. Natural gas that is subjected to compression of a lower pressure for the movement of Natural Gas through the pipeline remains Natural Gas and is not chargeable to excise duty at this stage.

4.1. From above said circular, it appeared that the activity of conversion of natural gas into Compressed Natural Gas whose pressure is around 200-250 kg/cm 2 amounts to manufacture and therefore liable to central excise duty. However, Natural Gas coming out of Oil Wells which is compressed at the compressor stations only to boost up the flow of gas in the pipeline is subjected to compression of a lower pressure for the movement of Natural Gas through the pipeline and remains Natural Gas and is not chargeable to excise duty at this stage.

4.2 Therefore, as already discussed in para supra, the activity of compression of Natural Gas by M/s Deep was not excisable as the gas was compressed to the extent of 20.0 to 22.0 kg/cm2g.

5 In view of the above discussion, letters from F.No. ST/4-118/AP-VIII/EA-2000/10- 11 dated 11.02.2011, 26.04.2011, 17.06.2011, 09.08.2011, 06.09.2011, 23.09.2011, 16.11.2011, 01.02.2012 were written to the jurisdictional Central Excise & Customs Division, Bharuch under whose jurisdiction M/s GACL fell. The said letters sought clarification in respect of the details of activity undertaken by M/s GACL and to find out whether M/s GACL was discharging any duty or tax liability at their end on compression of Gas by M/s Deep.

5.1 Further, a letter dated 13.03.2012 was also issued to M/s Deep Industries Ltd., Ahmedabad to provide details of payment received from M/s GACL in lieu of the contract executed by them for compression of Natural Gas. They were also requested to provide relevant account ledgers for the same.

5.2 M/s GACL vide their letter dated 30.06.2011 addressed to Superintendent, Central Excise & Customs, Range-IV, Bharuch submitted as follows:  they are receiving the Natural Gas from total 4 No. of sources at different pressures. The sources of receipt of gases are GGS-Dahej, GGS-JOLWA, GSPC & GAIL-RLNG. It is the technical requirement of the process to feed the Natural Gas at uniform pressure to generate steam i.e. @20 kg/cm2. Out of total 4 sources, they are receiving Natural Gas between 1 to 5 kg/cm2 pressure from two sources viz. GGS-Dahej & GGS-JOLWA, which are converted into 20 kg/cm2 pressure while from rest of the two sources viz. GSPC & GAIL-RLNG, they are receiving Natural Gas @40 kg/cm2 pressure which are reduced to 20 kg/cm2 pressure and fed to Gas Turbines for generation of Electricity. Natural Gas received in their factory premises, at various pressures, such as 1 to 5 kg/cm2 or 40 kg/cm2 is converted into uniform Pressure fo 20 kg/cm2, by compressing the Lower Pressure Natural Gas or Reduction of Higher Pressure Natural Gas to 20 kg/cm2, to suit the process requirements.  The aforesaid activity is undertaken in their factory premises by an appointed job worker viz. M/s Deep Industries Ltd., using his equipments, installed in their factory premises.  Mere compression of Natural Gas below the pressure of 200 kgs to 250 kgs/cm2 does not result into production of CNG. CNG which is a dutiable goods, when produced by compression of Natural Gas, to a pressure of 200 kgs. To 250 kgs/cm2.

3  In their case, the Natural Gas of a pressure of 1 to 5 kgs/cm2 is compressed to 20 kgs/cm2 and Natural Gas of a pressure of 40 kgs/cm2, is reduced to 20 kgs/cm2.  this activity does not result in production of CNG & therefore, the question of payment of any Central Excise duty on the goods in question, does not arise.  the job worker undertakes the aforesaid activities, in their factory premises and the compressed Natural Gas is consumed by them in the production of dutiable goods, in the same factory, in which the compressed Natural Gas, which is not CNG, is produced and therefore in terms of Notification No. 8/2005-ST dated 01.03.2005, the job worker will be not liable to pay service tax.

5.3 Further, M/s Deep vide their letter dated 22.03.2012 submitted that they were eligible for exemption granted through Notification No. 8/2005-ST dated 01.03.2005 for the job work done for M/s Gujarat Alkalies & Chemicals Ltd. (GACL). They further submitted that they are performing job work on the gas supplied by the GACL and GACL further use this gas for production of the goods which are cleared by GACL on payment of Excise duty. Mere use of the gas for generation of the electricity which is finally used for the production of the goods which are cleared on payment of Excise duty does not change the fact that the gas is used for production of final product by GACL. As per Rule 2(k) of Cenvat Credit Rules, 2004 clause (iii) specifically includes “all goods used for generation of electricity or steam for captive consumption” in the definition of “input”. Hence, even if no Excise duty is payable on electricity itself, materials used for production of electricity, are input for the final product. It is well settled principle that the exemption available to job work should be allowed for the job work done on the goods which are captively consumed by the manufacturer of the final product. Further, they have availed the exemption under bonafide belief that such exemption is available to them and it is also conveyed to them by GACL. Considering this they are of the firm opinion that they are rightly availing the benefit available under Notification No. 8/2005-ST dated 01.03.2005 on the job work done on gas supplied by GACL.

6. In view of the above, it was evident that M/s Deep were engaged in converting Natural Gas received at random pressure ranging from 1 - 5 Kgs/Cm2 to 40 Kgs/Cm2 to Natural Gas bearing a uniform pressure of 20 Kg/cm2 for feeding the same to Gas Turbines for generation of Electricity by using a gas compressor installed in the premises of M/s GACL. The process of minor compression of Natural Gas from low pressure to higher pressure or reducing the high pressure of Natural Gas to a lower pressure does not result in change of identity or content of Natural Gas. The final product remains Natural gas only when it is returned back to M/s. GACL. The only difference that is brought out is that the Natural Gas bearing random pressure at input stage is converted into Natural Gas of uniform pressure at output stage.

6.1 Therefore, the said resultant product – Natural Gas brought at uniform pressure (processed goods) were not manufactured goods as per Section 2(f) of the Central Excise Act, 1944, as clarified vide Board’s letter F.No. B.1/3/2001-TRU dated 21.05.2001.

7. The term “Business Auxiliary Service” has been defined under the provisions of Section 65(19) of the Finance Act, 1994 as under:

“business auxiliary service” means any service in relation to, —

(i) promotion or marketing or sale of goods produced or provided by or belonging to the client; or (ii) promotion or marketing of service provided by the client; or (iii) any customer care service provided on behalf of the client; or (iv) procurement of goods or services, which are inputs for the client; or [Explanation.— For the removal of doubts, it is hereby declared that for the purposes of this sub- clause, “inputs” means all goods or services intended for use by the client;] [(v) production or processing of goods for, or on behalf of the client; or] (vi) provision of service on behalf of the client; or (vii) a service incidental or auxiliary to any activity specified in sub-clauses (i) to (vi), such as billing, issue or collection or recovery of cheques, payments, maintenance of accounts and remittance, inventory management, evaluation or development of prospective customer or vendor, public relation services, management or supervision, and includes services as a commission agent, [but does not include any activity that amounts to “manufacture” of excisable goods.] [Explanation. — For the removal of doubts, it is hereby declared that for the purposes of this clause, 4 — (a) ”commission agent” means any person who acts on behalf of another person and causes sale or purchase of goods, or provision or receipt of services, for a consideration, and includes any person who, while acting on behalf of another person — (i) deals with goods or services or documents of title to such goods or services; or (ii) collects payment of sale price of such goods or services; or (iii) guarantees for collection or payment for such goods or services; or (iv) undertakes any activities relating to such sale or purchase of such goods or services; [(b) excisable goods” has the meaning assigned to it in clause (d) of section 2 of the Central Excise Act, 1944(1 of 1944); (c) “manufacture” has the meaning assigned to it in clause (f) of section 2 of the Central Excise Act, 1944(1 of 1944)]

7.1 Further, clause zzb of section 65(105) of Finance Act, 1994, defines taxable service as: "taxable service" means any [service provided or to be provided to a client, by [any person] in relation to business auxiliary service; From the definition of ‘Business Auxiliary Service’ given under section 65(19) of the Finance Act, 1994 and as per definition of ‘Taxable Service’ given under clause (zzb) of section 65(105) of the Finance Act, 1994, it appeared that the services provided by M/s Deep fell under clause (v) of Section 65 (19) of the Finance Act, 1994 in as much they were processing natural gas for their clients M/s GACL.

8. M/s GACL in their letter discussed at para 5.1 supra submitted that in terms of Notification No. 8/2005-ST dated 01.03.2005, the job worker was not liable to pay service tax. A plain reading of the said notification revealed that the said exemption was only available in case where the finished goods were dutiable and the appropriate duty shall not include ‘Nil’ rate of duty. The said notification is produced herein below for reference:

8.1 Notification No. 8/2005-ST dated 01.03.2005

In exercise of the powers conferred by sub-section (1) of section 93 of the Finance Act, 1994 (32 of 1994) (hereinafter referred to as the Finance Act), the Central Government, on being satisfied that it is necessary in the public interest so to do, hereby exempts the taxable service of production of goods on behalf of the client referred in sub-clause (v) of clause (19) of section 65 of the said Finance Act, from the whole of service tax leviable thereon under section 66 of the said Finance Act:

“ Provided that the said exemption shall apply only in cases where such goods are produced using raw materials or semi-finished goods supplied by the client and goods so produced are returned back to the said client for use in or in relation to manufacture of any other goods falling under the First Schedule to the Central Excise Tariff Act, 1985 (5 of 1986), as amended by the Central Excise Tariff (Amendment) Act, 2004 (5 of 2005), on which appropriate duty of excise is payable.”

Explanation.- For the purposes of this notification,-

(i) the expression “production of goods” means working upon raw materials or semi- finished goods so as to complete part or whole of production, subject to the condition that such production does not amount to “manufacture” within the meaning of clause (f) of section 2 of the Central Excise Act, 1944 (1 of 1944);

(ii) “appropriate duty of excise” shall not include ‘Nil’ rate of duty or duty of excise wholly exempt.

9. It appeared that in the present case the gas was compressed to a uniform pressure of 20 Kg/cm2 by M/s Deep for feeding the same to Gas Turbines for generation of Electricity at M/s GACL. Further, the Electrical energy (Electricity) falling under S.H. No. 27160000 of CETA, 1985 was exempted vide tariff Entry itself.

9.1 In view of the above, it appeared that the compressed natural gas (at a uniform pressure of 20 Kg/cm2) used for generation of electricity was an exempted product. Thus, this was not in consonance with the condition for exemption brought out under notification No. 8/2005-ST dated 1.3.2005 and accordingly, the benefit of the said notification was not available to M/s Deep.

9.2 Since the said “Electrical Energy” did not attract appropriate duty of Excise and the said resultant product- processed goods did not amount to manufacture as per 5 Section 2(f) of the Central Excise Act, 1944, the said activity undertaken by M/s. Deep Industries Ltd would be covered under clause (v) of section 65(19) of Finance Act, 1994 and the said service provider would be liable to pay service tax under the category of “Business Auxiliary Service”.

10. M/s Deep submitted the ledger accounts of income earned for the period from 01.04.2006 to 31.03.2010 from M/s GACL for the above mentioned activity of compression of Natural Gas. They also submitted detail of amount collected by the assessee from M/s. GACL for the period from 01.04.2010 to 31.03.2011. Perusal of the said submissions revealed that they had during the period from 01.10.2006 to 31.03.2011 received Rs.6,06,43,893/- from M/s GACL on account of services provided by them under the category of “Business Auxiliary Services”. As per the details worked out in (Annexure B to this SCN), they appeared liable to pay Service Tax of Rs. 68,38,825/- (including cess) on the taxable value of Rs.6,06,43,893/- and the same was required to be recovered under section 73(1) of Finance Act, 1994, along with the interest by invoking extended period of 5 years.

11. Scrutiny of the ST-3 returns filed by M/s Deep revealed that they had only filed ST- 3 Returns for “Mining Services” and “Transport of Goods by Road Service”. They had not filed ST-3 Returns for services provided by them under the category of “Business Auxiliary Service” nor they had shown the amount received by them in lieu of the services provided by them under the said category. Thus, M/s Deep had suppressed the value of income generated by them on account of taxable Services provided by them under the category of Business Auxiliary Service to GACL, during the period 1.4.2006 to 31-03- 2011 by not declaring the amount and failing to discharge service tax liability under the said category.

12. Thus, it appeared that M/s Deep had contravened the following provisions:

i. Section 67 of the Finance Act, 1994 in as much as, they had failed to determine the correct value of taxable services provided by them. ii. Section 68 of the Finance Act, 1994 read with Rule 6 of the Service Tax Rules, 1994 in as-much-as they had failed to pay the service tax as mentioned in para supra for the period from 1.4.2006 to 30.3.2011 in case of services provided by them under the category of “Business Auxiliary Service” to the credit of the Government within the stipulated time limit; the act of contravention of the provisions of Section 68 of the Finance Act, 1994 as amended read with Rule 6 of the Service Tax Rules, 1994 appeared to be punishable under the provisions of Section 76 of the Finance Act, 1994. iii. Section 69 of the Finance Act, 1994 read with Rule 4 of the Service Tax Rules, 1994 provides that every person liable to pay service tax should make an application within a period of thirty days from the date on which the service tax under Section 66 of the Finance Act, 1994. M/s Deep had contravened the provisions of the said section in as much as they failed to obtain service tax registration under “Business Auxiliary Service” within the stipulated time period. iv. According to Section 70 of the Finance Act, 1994, every person liable to pay service tax is required to himself assess the tax due on the services provided by him and thereafter furnish a return to the jurisdiction Superintendent of Service Tax by disclosing wholly and truly all material facts in the ST-3 returns. In the instant case M/s Deep had contravened the provision under Section 70 of the said Act as they had not disclosed full, true and correct information about the value and nature of the service provided by them and had failed to self assess their nature and value of service.

13. It appeared that M/s Deep had not taken into account the service tax payable by them for rendering taxable service for the purpose of self assessment and payment of applicable service tax and thereby not complied with their tax liabilities. It appeared that the deliberate action of not declaring the value in ST-3 Returns and not paying the service tax on the same was in utter disregard to the requirements of law and breach of trust deposed on them was certainly not in tune with Governments efforts in the direction to create a voluntary tax compliance regime.

6 14. All the above acts of contravention of Finance Act, 1994, as amended and Rules made there under, on the part of M/s Deep appeared to had been committed by way of suppression of facts with intent to evade payment of Service Tax. Therefore, Service Tax amounting to Rs. 68,38,825/- wais required to be demanded and recovered from them under the proviso of section 73 (1) of the Finance Act, 1994 by invoking extended period 5 years. All these acts of contravention of the provisions of Section 68, Section 69 and Section 70 of the Finance Act, 1994 as amended, read with Rule 4, 6 and 7 of the Service Tax Rules, 1994 appeared to be punishable under the provisions of Section 76 and Section 77 of the Finance Act, 1994 as amended from time to time.

15. From the evidence, it appeared that M/s Deep had not taken into account all the incomes received by them for rendering taxable services for the purpose of payment of service tax and thereby minimize their tax liabilities. The deliberate efforts to mis-declare the value of taxable service in ST-3 returns and not paying the correct amount of service tax is utter disregard to the requirements of law and breach of trust deposed on them and such outright act in defiance of law appears to have rendered them liable for stringent penal action as per the provisions of Section 78 of Finance Act 1994 for suppression or concealment or furnishing inaccurate value of taxable service with intent to evade payment of service tax.

16. Further, as per Section 75 ibid, every person liable to pay the tax in accordance with the provisions of Section 68, or rules made there under, who fails to credit the tax or any part thereof, to the account of the Central Government within the period prescribed, shall pay simple interest (at such rate not below ten percent and not exceeding thirty six percent per annum, as is for the time being fixed by the Central Government, by notification in the official Gazette) for the period by which such crediting of the tax or any part thereof is delayed. M/s Deep had not discharged their Service Tax liability and hence appeared liable to pay Service Tax with interest under Section 75 of the act.

17. Accordingly, Deep Industries Limited, 6th Floor, Astron Tower, Opp Fun- Republic Cinema, S. G. Highway, Ahmedabad – 15 was called upon to show cause as to why :- i) the services of compression of Natural Gas rendered by them to M/s Gujarat Alkalies and Chemicals Ltd., should not be classified under the category of “Business Auxiliary Service”, made taxable under Section 65(105)(zzb) of the Finance Act 1994, as amended and the amount of Rs. 6,06,43,893/- should not be considered as taxable value for the purpose of arriving their service tax liability.

ii) Service Tax amounting to Rs. 68,38,825/- (Rupees Sixty Eight Lakhs Thirty Eight Thousand Eight Hundred Twenty Five only) (inclusive of Education Cess & Secondary and Higher Education Cess) should not be charged and recovered from them under the proviso to Section 73(1) of the Finance Act, 1994, as amended by invoking the extended period of five years;

iii) Why interest at the prescribed rate chargeable under the provisions of Section 75 of the Finance Act, 1994, as amended, should not be recovered from them;

iv) penalty under the provisions of Section 76 of the Finance Act, 1994, as amended, should not be imposed on them for failure to pay Service Tax and Education Cess as mentioned hereinabove;

v) penalty under Section 77 of the Finance Act, 1994, as amended, should not be imposed on them in as much as they failed to obtain Service Tax registration for services provided by them under the category of “Business Auxiliary Service” and also failed to file the prescribed ST-3 returns containing true and correct details and within stipulated period as required under the provisions of aforesaid Section 70 read with Rule 7 of the Service Tax Rules, 1994 as amended;

vi) penalty under Section 78 of the Finance Act, 1994, as amended, should not be imposed on them for suppressing the full value of taxable services and

7 material facts before the department resulting into non-payment of Service Tax and Education Cess.

Defence Submissions:-

18. M/s Deep vide their letter dated 31.5.2012 put forth a detailed defence reply with respect to Show Cause Notice F.No: STC/4-2/O&A/12-13 dated 20.4.2012. The submissions made by M/s. Deep are enumerated below:-

(i) They are providing Mining Services and duly registered with the department vide registration No. AAACD6915EST001 and their books and records are also regularly audited by the service tax department under EA-2000 audit procedures. (ii) They are compressing the natural gas within the factory of the GACL situated at Dahej. They are receiving the low pressure natural gas supplied by the GACL, compressing the same and gas so compressed is returned back to the GACL. GACL uses this compressed natural gas in Gas Turbine for generation of electricity. Electricity produced is used by GACL in production of the Dutiable Goods namely Caustic Soda, Hydrochloric Act, Chlorine, Hydrogen Peroxide, Phosphoric Acid etc. The gas supplied by the GACL is processed and gas so processed is returned back to the GACL for use in or in relation to manufacture of any other goods falling under the First Schedule to the Central Excise Tariff Act, 1985 on which appropriate duty of excise is payable. Hence, the exemption available under Notification No. 8/2005-ST dated 01-03-2005 is available and service tax is not payable by us. (iii) The SCN states that as the compressed gas is used by the GACL for generation of electricity on which no excise duty is payable, exemption granted under Notification No. 8/2005-ST is not available. This contention is not correct. Fact that such electricity is used in the manufacture of the dutiable goods by the GACL is totally ignored. (iv) Notification No. 8/2005-ST Dated 01-03-2005 exempts service of production or processing of goods for, or on behalf of, the client from the whole of the service tax leviable thereon. Notification stipulates following conditions for such exemption. i. Goods are produced or processed using raw materials or semi-finished goods supplied by the client. ii. Goods are returned back to the client. iii. Such Goods are used in or in relation to manufacture of goods. iv. Goods so produced by the client are falling under the First Schedule of Central Excise Tariff Act, 1985 on which appropriate duty (not “Nil” rate of Duty) of excise is payable by the client. Regarding first two conditions, there is no doubt to the department and it is not the issue raised by the department. As far as third condition is concerned, GACL has clarified to the department vide their letter dated 31/01/2011 that they have used such gas as raw material/processing materials by the GACL in the production of excisable finished goods namely Caustic Soda, Hydrochloric Act, Chlorine, Hydrogen Peroxide, Phosphoric Acid etc. and GACL is paying excise duty on clearance of these final products. As above mentioned final products by GACL are covered under the Central Excise Tariff Act, 1985, forth condition is also satisfied. As all conditions stipulated by the Notification No. 8/2005-ST is satisfied, they have rightly availed the exemption. (v) From the third condition stated above and as provided in Notification No. 8/2005-ST, goods which are processed by the job worker and returned back to the client shall be “used in or in relation to manufacture” by the client. Thus not only material directly used in manufacture of the final product by the client but also material used “in relation to the manufacture” also qualify for the exemption granted under the Notification No. 8/2005-ST. Compressed Natural Gas returned back to the GACL is used by the GACL in production of excisable goods. It may not be directly used as raw material but may be 8 used to generate the electricity which in turn “used in relation to manufacture” the excisable final product by GACL. (vi) Words “in relation to manufacture” have wide meaning. The expression “in relation to” is a very broad expression, which pre-supposes another subject matter. These are words of comprehension which might both have a direct significance as well as an indirect significance. Thus not only material which is directly used in the manufacture but also indirect material can also processed availing exemption granted by the Notification No. 8/2005-ST. (vii) “Manufacture” includes all processes incidental or ancillary to manufacture. Both neither without Compression of Natural Gas nor without electricity, production of the excisable goods by GACL is possible and hence both processes are “in relation” to the manufacture. (viii) Electricity is intermediary product and hence crucial for the production. If manufacture can’t take place without a process, that process is integral part of the manufacture. (ix) Use of some article not in main stream of manufacturing process but that may be used otherwise in assisting the process of manufacture. Words “in relation to manufacture” used in the Notification accommodate process of such inputs used in assisting the process of manufacture and not directly in main stream of manufacturing. Thus, goods processed on behalf of GACL is used by the GACL “in relation to manufacture” of final excisable product and processing of such goods qualify for the exemption granted under the Notification No. 8/2005-ST. (x) It may happen that inputs are used in manufacture of an exempt intermediary product but final product is dutiable. In such as case it is well settled principle that CENVAT credit is allowed on such inputs used in production of exempt intermediary products if final product is chargeable to duty. In this regards following shall be considered. CBEC has accepted this concept and issued following two circular in which CBEC has categorically clarified that Inputs/Capital Goods used in manufacture of exempted intermediary products are eligible for CENVAT Credit.

“It is, therefore, clarified that Cenvat credit should not be denied on the capital goods used in manufacturing of intermediate goods exempt from payment of duty which are used captively in the manufacture of finished goods chargeable to duty.” – Para 3 of the Circular No. 665/56/2002- CX., dated 25-9-2002.

“Similarly, CENVAT should not be denied if the inputs are used in any intermediate of the final product even if such intermediate is exempt from payment of duty. The basic idea is that CENVAT credit is admissible so long as the inputs are used in or in relation to the manufacture of final products, and whether directly or indirectly.” – Para 3.7 of Chapter V of the CBEC’s Central Excise Manual (2005). (xi) M/s Deep cited following case laws where it has been held that credit of input used in intermediary products is available even if intermediary products are exempt and such intermediary products are used captively for the production of the dutiable goods.

1. CCE, New Delhi V. Hindustan Sanitaryware & Industries [2002 (145)

E.L.T. 3 (S.C.)].

2. Bharat Forge Ltd. V. CCE, Pune-III [2004 (165) E.L.T. 339 (Tri.-

Mumbai)].

3. SAIL V. CCE, Ranchi [2008 (222) E.L.T. 233 (Tri. - Kolkata)]. (xii) Electricity may be generated by the manufacturer itself using the inputs. Although Electrical Energy is goods falling under the (SHN 27160000) First Schedule to the Central Excise Tariff Act, 1985, no rate of duty is prescribed against the same. However, if the same electricity is used by the manufacture for production of excisable goods, 9 CENVAT credit can be taken for inputs used for generation of electricity even if no duty is payable on electricity. This principal has found correct in number of cases and upheld by various forums. Although numbers of judgments are rendered in this regard, some important decisions are stated below:- 1.1. CCE V. Solaris Chemtech Limited [2007 (214) ELT 481 (SC)]. 1.2. Ballarpur Paper Industries Ltd. V. CCE, Belgaum [2000 (116) E.L.T. 312 (Tribunal)]. 1.3. IOC Ltd. V. CCE, Vadodara [2002 (148) ELT 1021(Tri. Del.)]. 1.4. Indian Oil Corporation Limited V. CCE Baroda [2006 (202) ELT 37(SC)]. 1.5. Hindustan Petroleum Corporation Ltd. V. CCE, Visakhapatnam [2008(221) ELT 238 (Tri. Bangalore)]. In all above cases, even if no excise is payable on electricity, materials used for the production of the electricity, which is finally used in manufacture of excisable goods, are considered as “inputs” for CENVAT credit or allowing exemptions. (xiii) Further, the Board had issued a circular which reads as under:- “Eligibility of concession under Notification Nos. 74/63-C.E., dated 18-5-63 & 353/77- C.E., dated 16-12-77.

In supersession of the Board’s instructions contained in F. No. 3565-CX-3 dated 16-9-67 it has been decided that since generation of electrical energy (electricity) as an intermediate product is incidental in the process and manufacture of petroleum products falling under T.I. Nos. 6 to 11AA the exemption contained in the Notification No. 352/77-C.E., dt. 16-12-77 as amended by Notification Nos. 131/80-C.E., dt. 23-8-80 and 41/82-C.E., dt 28-2-82 would be available to the quantity of intermediate product electricity. The exemption contained in this notification will however, not be available to that quantity of petroleum products which is used in the generation of electricity which, in turn, is not used in the process and manufacture of petroleum products.”

- Board’s letter F. No. 89/13/82-CX-3, dt. 6-7-83

Although this clarification is issued in respect of other exemption notification, ratio laid down is applicable to the exemption granted through Notification No. 8/2005-ST also. Issue is squarly covered under this clarification in our favour. The entire proceedings may be dropped on the basis of this clarification itself. (xiv) Rule 2(k) (as prevailing upto 31-03-2011) of the CENVAT Credit Rules, 2004 defines the term input as follows:-

“2(g) :- “input” means-

(i) all goods, except light diesel oil, high speed diesel oil and motor spirit, commonly known as petrol, used in or in relation to the manufacture of final products whether directly or indirectly and whether contained in the final product or not, and includes lubricating oils, greases, cutting oils, coolants, accessories of the final products cleared along with the final product, goods used as paint, or as packing material, or as fuel, or for generation of electricity or steam used in or in relation to manufacture of final products or for any other purpose, within the factory of production.” From the above definitions, it is very clear that goods used for generation of electricity or steam used in or in relation to manufacture of final product is “input”. Compressed Natural Gas supplied to GACL is the goods used by GACL for generation of electricity which is finally used in or in relation to manufacture of final product. Otherwise also, Compressed Natural Gas supplied to GACL is used as fuel by GACL, which is again “input” for GACL. (xv) Thus Compressed Natural Gas supplied to GACL is “input” which is “used by GACL in or in relation to manufacture” goods on which duty is payable at appropriate rate. Thus although such gas is directly used to produce the electricity, it is still used “in relation to manufacture” final dutiable products and all conditions stipulated by the Notification No. 8/2005-ST are satisfied and exemption is rightly claimed by them. (xvi) As per proviso to Notification No. 8/2005-ST, exemption is available only in cases where such goods processed are used by the client in or in relation to manufacture of any other goods falling under the First Schedule to the Central Excise Tariff Act, 1985, on 10 which appropriate duty of excise is payable. Further “appropriate duty of excise” is defined not to include ‘Nil’ rate of duty or “duty of excise wholly exempt”. As per entry No. 27160000 there is no rate of duty is prescribed in the Tariff. Hence, electricity is neither charged at “Nil” rate of duty nor “duty of excise wholly exempt”. Hence, bar created by the proviso is not applicable to the electricity. The same ratio is also upheld by the Tribunal in the case of Ballarpur Paper Industries Ltd. V. CCE, Belgaum [2000 (116) E.L.T. 312 (Tribunal)]. (xvii) Material used for generation of the electricity is “input” for the final excisable goods; electricity is essential for the manufacture; CENVAT credit for inputs used for generation of electricity is available despite the fact that no duty is payable on electricity; gas compressed is “fuel” which is accepted as “input” by the law; even if duty is paid on the process of compression of the gas, credit for the same was available to GACL; to avoid the fruitless exercise of payment by job worker and credit by principal, Government has granted exemption to Job Worker; Notification specifically accommodates processing of goods used “in relation to manufacture” and intermediary exempt products are also given exemption from payment of duty. Only proposition that can be drawn from the above situation is that exemption granted under notification No. 8/2005-ST is available not only for the goods directly used in the manufacture by the client but also for the goods used in relation to the manufacture by the client. (xviii) M/s Deep further contends that their records have been regularly audited by the department under EA-2000 audit procedures as follows:-

Financial Year Audit Undertaken Audit Report No. Audit Report Under Audit on Date 2007-08 05-06-2009 84/2009 22-09-2009 2008-09 05-06-2009 84/2009 22-09-2009 2009-10 06-09-2010 97/2010-11 01-11-2010 to 22-09-2010 2010-11 22-11-2011 110/2011-12 16-02-2012 to 14-12-2011

For the financial year 2007-08 and 2008-09, as per revenue para 1, Sr. No. 3(viii) of the Audit Report No. 84/2009 dated 22-09-2009, income from GACL is clearly identified by the Audit Party as Non Taxable income. As per para 5 of the SCN (page No. 3) Letter from F. No. ST/4-118/AP-VIII/EA- 2000/10-11 various letters are written to departmental office having jurisdiction over GACL starting from 11-02-2011 i.e. even before nine months from the starting of audit for the financial year 2010-11. Even before that date, Bharuch Division of Excise Department has written a letter No. R-IV/GACL/2010-11 dated 12-01-2011 to the GACL. The said letter is answered by the GACL vide their letter dated 31-01-2011. Issue of exemption of 8/2005-ST on the goods processed for GACL is raised by the Audit Party earlier during the audit for all years at various times and accepted by the department earlier as rightly availed. The same activity, at same site, for same client, under same contract is undertaken for the period under dispute. Earlier accepted and now disputed by the department. Thus it is a fact on the record that department was in the knowledge about the issue involved at least since 22-09-2009 i.e. date of Audit Report 84/09 for the financial year 2007-08 and 2008-09 in which Audit Party has accepted the same service as non taxable. SCN is issued on 20-04-2012 i.e. after 31 months from the date of knowledge. (xix) Suppression means something which is hidden from the department. Once facts are in the knowledge of the department, question of suppression doesn’t arise. SCN alleges the charge of the suppression which is totally contradictory to the facts available on the record. In absence of suppression, question of penalty under section 78 also doesn’t arise. 11 (xx) From the forgoing paragraph, it is crystal clear that department was aware about the issue and hence question of suppression doesn’t arise. In absence of suppression, proviso to section 73(1) can’t be applied and extended period of limitation is not available. Hence, demand raised for the period above one year is clearly time barred. (xxi) It is well settled principle that if the facts are in knowledge of the department, charge of suppression can’t sustain. M/s Deep relied on the following decisions:- 1. Nizam Sugar Factory V. CCE [2006 (197) ELT 465 (SC)]. 2. CCE V. CMS Computers [2005 (182) ELT 20 (SC- 3 Members)]. 3. Dolphine Detective Agency V. CCE [2006 (4) STR 25(CESTAT)]. 4. Pushpam Pharmaceutical Co. V. CCE [1995 (78) ELT 401(SC)]. 5. Sarabhai M Chemicals V. CCE [2005 (179) ELT 3 (SC-3 member bench)]. 6. Anand Nishikawa Co. Ltd. V. CCE [2005 (188) ELT 149 (SC)]. 7. Gannon India V. CCE [2002 (146) ELT 173 (CEGAT)]. 8. Omkar Textile Mills Ltd. V. CCE, Ahmedabad [1999 (107) ELT 787 (Tri.- Mumbai)].

(xxii) The exemption under notification no. 8/2005-ST was availed based on bona fide belief that the same was rightly available to them. In this connection GACL has also expressed the same view vide their letters dated 17/09/2010 and 21/04/2012. M/s GACL also advised them that such exemption is available to them; department is also aware about the exemption since long and have not objected in past; goods processed by them are used by GACL in or in relation to manufacture of final excisable product; even GACL has informed department in writing that such a exemption is available. Thus, they had strong bona fide belief that exemption granted under notification No. 8/2005-ST was available to them. Reasonable cause in form of bona fide belief is available and as provided under section 80 of the Finance Act, 1994, no penalty should be imposed. (xxiii) Show cause notice proposes to impose penalties under section 76 and 78 of the Finance Act, 1994. However, a proviso inserted to Section 78 by Finance Act, 2008 clearly provides that if the penalty is payable under this section, the provisions of Section 76 shall not apply. It means that penalty under both the sections cannot be imposed simultaneously. SCN proposing both penalties simultaneously is against the provisions of the Finance Act, 1994. (xxiv) For the period even before 10-05-2008, now it is well settled that both penalties under section 76 and 78 can’t be imposed simultaneously. (xxv) Further, SCN is issued on 20-04-2012, i.e., after enactment of the Finance Act, 2008. Law prevailing on the date of issuance of SCN should be applied and both the penalties under section 76 and 78 should not be imposed simultaneously. [Atma Steels Pvt. Ltd. and others V. CCE, Chandigarh and Others [1984 (17) E.L.T. 331 (Tribunal - LB)]. (xxvi) Further, SCN also proposes to impose penalties under section 77 for non- registration and non-filing of returns. As they are already registered since 2007, paying service tax regularly and filing our ST-3 returns regularly, penalties under section 77 should not be imposed. 19. M/s Deep further gave their written submissions vide letter dated 27.5.2013 at the time of personal hearing. Following are the main submissions:-

(a) Assuming without admitting that exemption under Notification No. 8/2005-ST was not available, they relied on the principal, M/s Gujarat Alkalies and Chemicals Ltd (GACL), from whom they had received the goods for processing that service tax is not payable by them on services provided by the them as per provisions of Notification No. 8/2005-ST dated 01-03-2005. On reply to the departmental enquiry, GACL has conveyed such fact to the department also vide their letter dated 31-01-2011. Thus, they relied upon the declaration from the principal for whom goods are processed and hence demand can’t be confirmed on us and extended period of limitation can’t be invoked. M/s Deep relies on the following case laws:- i. They have not required to verify the correctness of the declaration made by the principal/owner of the goods and tax can’t be demanded from the job worker even if declaration of the principal is not correct. Nothing is alleged in the SCN that DIL was aware about the facts that goods processed by the DIL 12 are being used by DIL. In such a case, extended period of the limitation can’t be invoked and demand can’t be confirmed on job worker. Above ratio had been laid down by Hon’ble Supreme Court in the case of CCE, Mumbai V. Lajya Dyeing & Bleaching Works [2008 (224) ELT 345 (SC) ]. ii. In the case where goods received under Notification No. 214/86-CE and cleared by the Job Worker and such goods were used by the principal manufacturer for exempted goods, it was held that job worker can’t be expected to know that goods manufactured by them were going to be used by principal manufacturer for dutiable or exempted product. Further, it is held that in such situation, extended period of the limitation can’t be invoked. – CCE, Ahmedabad V. Satia & Co. [ 2010 (262) ELT 530 (Tri. Ahmd.) ] (b) Even if it is assumed that exemption is not available, as per Section 67(2) of the Finance Act, 1994 where the gross amount charged by a service provider for the service provided or to be provided is inclusive of service tax payable, the value of such taxable service shall be such amount, with the addition of tax payable, is equal to gross amount charged. Thus, even if service tax is payable, value charged from GACL is to be considered as value inclusive of service tax. (c) Further, even if it is assumed that the exemption under notification number 8/2005- ST was not available to M/s Deep, GACL is able to take the CENVAT credit of the Service Tax Charged by them. In such a case entire proceeding initiated by the SCNs is revenue neutral and hence proceeding should be dropped. (d) Further, as CENVAT Credit is available to GACL, no benefit has become available either to M/s Deep or to GACL by availing exemption under notification no. 8/2005- ST. Hence, by claiming exemption, M/s Deep has not saved his service tax liability and in such situation it can’t be held that there was intention to evade the service tax. In absence of such intention, extended period of limitation can’t be invoked and penalty can’t be imposed.

Personal Hearing :–

20. The Personal hearing of the case was fixed on 27.5.2013. Shri Punit Prajapati, Chartered Accountant was attended the hearing on behalf of M/s Deep and reiterated submissions and case laws given in their reply dated 31.5.2012 and requested to drop the case. Shri Prajapati also gave additional written submissions vide letter dated 27.5.2013.

Discussion & Findings:–

21. I have carefully gone through the show cause notice, documents related thereto and submissions made by M/s Deep in their written replies and record of personal hearing.

22. The Show case notice has emanated from an Audit objection. During the Course of Audit, it was noticed that the M/s Deep was providing services in relation to compression of Natural Gas at the premises of M/s. Gujarat Alkalies & Chemicals Ltd (herein after referred to as “GACL”) and that the activity of compression of Natural Gas was covered under the category of Business Auxiliary Service but exempted vide Notification No. 8/2005-ST dated 01-03-2005.

23. The issues to be decided in this case are:-

i) Whether the process of compression of gas undertaken by M/s Deep in the premises of M/s GACL is not an activity amounting to ‘manufacture’ as per Section 2(f) of the Central Excise Act, 1944 so as to get categorized under ‘Business Auxiliary Services’ ? ii) Whether M/s Deep is eligible to avail exemption from payment of service tax provided in Notification No.8/2005-ST dated 1.3.2005?

24. As per facts available on record and admitted by M/s Deep, they have been engaged in the compression of natural gas for M/s GACL (M/s Gujarat Alkalies & 13 Chemicals Ltd) in the premises of M/s GACL, Dahej. I find that Chapter Note 5 of Chapter 27 of the Central Excise Tariff Act, 1985 reads as “in relation to natural gas falling under heading 2711, the process of compression of natural gas (even if it does not involve liquefaction), for the purpose of marketing it as Compressed Natural Gas(CNG), for use as a fuel or for any other purpose, shall amount to ‘manufacture’.”

25. It is alleged in the Show Cause Notice that M/s Deep were engaged in converting Natural Gas received at random pressure ranging from 1 - 5 Kgs/Cm2 to 40 Kgs/Cm2 to Natural Gas bearing a uniform pressure of 20 Kg/cm2 for feeding the same to Gas Turbines for generation of electricity by using a gas compressor installed in the premises of M/s GACL. The process of minor compression of Natural Gas from low pressure to higher pressure or reducing the high pressure of Natural Gas to a lower pressure does not result in change of identity or content of Natural Gas. The final product remains Natural gas only when it is returned back to M/s. GACL. The only difference that is brought out is that the Natural Gas bearing random pressure at input stage is converted into Natural Gas of uniform pressure at output stage. Therefore, the SCN alleges that the said resultant product – Natural Gas brought at uniform pressure (processed goods) were not manufactured goods as per Section 2(f) of the Central Excise Act, 1944, as clarified vide Board’s letter F.No. B.1/3/2001-TRU dated 21.05.2001. The relevant portion of this letter is reproduced here-in-below:-

“ I am directed to say that, as you aware, excise duty was imposed on Compressed Natural Gas (CNG) @ 8% (50% of CENVAT rate of 16%) w.e.f. 1st March, 2001. In this context, it has been reported that Natural Gas coming out of Oil Wells is compressed at the compressor stations only to boost up the flow of gas in the pipeline. The pressure of the natural gas at this stage is much less than the pressure, which is applied to convert natural gas into Compressed Natural Gas for sale. The pressure of the gas when it is compressed as CNG is around 200-250 Kg/Cm2 as against a low pressure of the order of 50-90 Kg/Cm2 only, which is required for the flow and movement of the natural gas through the pipe line. Doubts have been raised whether the natural gas, which is subjected to lower pressure only for movement of the gas through the pipeline, is also to be subjected to excise duty as Compressed Natural Gas. 2. It may be clarified that the excise duty applies to Compressed Natural Gas only. Exemption from excise duty has been provided to natural gas. As such, it is only when natural gas is converted into Compressed natural Gas, which is the product marketed and sold for automobile fuel that the duty liability arises. Natural gas that is subjected to compression of a lower pressure for the movement of Natural Gas through the pipeline remains Natural Gas and is not chargeable to excise duty at this stage.

25.1 I find that the said letter of the Board clarifies that excise duty applies to Compressed Natural Gas and exemption from excise duty has been provided to natural gas. It further clarifies the stage at which excise duty is chargeable on compressed gas. The said letter does not provide any clarification as to whether the activity of compression of natural gas is an activity of ‘manufacture’ or not. Further the said clarification was issued by CBEC after introduction of chapter Note No. 10 in chapter No. 27 in the Budget,2001 effective from 11.05.2001. The same has been amply clarified with the introduction of Chapter Note 5 [renumbered] of Chapter 27 which says that “in relation to natural gas falling under heading 2711, the process of compression of natural gas (even if it does not involve liquefaction), for the purpose of marketing it as Compressed Natural Gas(CNG), for use as a fuel or for any other purpose, shall amount to ‘manufacture’.”

25.2 Thus, it is wrongly concluded in the show cause notice that the said process of compression of natural gas at a particular pressure is not an activity of ‘manufacture’ which led to the said activity carried out by M/s Deep in the premises of M/s GACL being categorized as ‘Business Auxiliary Service’ and subsequent denial of the benefits contained in Notification No. 8/2005-ST dated 1.3.2005.

25.3 It is the submission of M/s Deep that M/s GACL is manufacturing excisable goods such as Caustic Soda, Hydrochloric Acid, Chlorine, Hydrogen Peroxide, Phosphoric Acid etc on which appropriate duty of excise is payable.

25.4 Definition of “manufacture” as given in Section 2(f) of Central Excise Act, 1944 is reproduced hereunder: f) “manufacture” includes any process, -

i) incidental or ancillary to the completion of a manufactured product; ii) which is specified in relation to any goods in the Section or Chapter notes of the First Schedule to the Central Excise Tariff Act, 1985 (5 of 1986) as amounting to manufacture; or 14 which, in relation to the goods specified in the Third Schedule, involves packing or iii repacking of such goods in a unit container or labelling or re-labelling of containers ) including the declaration or alteration of retail sale price on it or adoption of any other treatment on the goods to render the product marketable to the consumer;

and the word “manufacturer” shall be construed accordingly and shall include not only a person who employs hired labour in the production or manufacture of excisable goods, but also any person who engages in their production or manufacture on his own account;

25.5 The allegation made in the show cause notice that the compressed natural gas is required to run turbines for generation of electricity is a half truth. M/s GACL is not engaged in the production and sale of electricity, but is engaged in the manufacture of excisable goods and it is to achieve this objective, they have hired M/s Deep. The gas compressed by M/s Deep is used in the production / manufacture of excisable goods falling under CETA, 1985 and chargeable to appropriate rate of duty. Therefore, the process of compression of gas done by M/s Deep is a process incidental or ancillary to the completion of a manufactured product which gets covered under the definition of manufacture as per Section 2(f) of the CEA, 1944 and therefore the activity undertaken by the assessee gets excluded from the purview of ‘Business Auxiliary Service. Hence there is no applicability of Notification No. 8/2005-ST dated 1.3.2005.

25.6 My above findings are also supported by the following letter issued by CBEC.

BAS — Job work exemption notification available only when activity not amounts to manufacture Letter Dy. No. 2305/Commr(ST)/2011, dated 15-7-2011 Government of India Ministry of Finance (Department of Revenue) Central Board of Excise & Customs, New Delhi

Subject :Representation by M/s Cygnus Apparel Pvt. Ltd. - Regarding show cause notice No. V(15)227/I/Adj/Ad/10/18380, dated 19-10-2010.

Please refer to your letter C. No. V(12)22/SIV/STGr.B/Kol/07, dated 24-6-2011 on the subject mentioned above.

2. The issue raised in you said letter is regarding leviability of service tax under Business Service (BAS) on computer embroidery work carried out on job work.

3. The matter has been examined. The definition of BAS as provided under Section 65(105)(zzb) read with Section 65(19) of the Finance Act, 1994, does not include any activity that amounts to manufacture of excisable goods. It also mentions that excisable goods has the meaning assigned to it in clause (d) of section 2 of the Central Excise Act, 1944 and manufacture has the meaning assigned to it in clause (f) of section 2 of the Central Excise Act, 1944. The Supreme Court in the case of UOI v. Nandi Printers Pvt. Ltd. [2001 (127) E.L.T. 645 (S.C.)] held that “the mere fact that the rate of duty on printed cartons was NIL by reason of exemption would not make printed cartons non-excisable goods”. The Supreme Court again in the case of CCE, Hyderabad v. Vazir Sultan Tobacco Co. Ltd. [1996 (83) E.L.T. 3 (S.C.)] at page 10 has observed that if by virtue of exemption the rate of duty was reduced to NIL the goods specified in the Tariff would still be regarded as excisable. Further the Supreme Court in the case of All India Federation of Tax Practitioners v. UOI [2007 (7) S.T.R. 625 (S.C.)] laid down a test that where goods are specified in the schedule they are excisable.

4. In your said letter at para 5 it is mentioned that embroidery work is a manufacturing activity falling under Chapter heading 5810 of the Central Excise Tariff Act. Once the activity is a manufacturing activity of goods specified under Central Excise Tariff Act, the said activity is not covered in the purview of BAS. When the activity is not a taxable service, the provisions of Notification No. 8/2005- S.T., dated 1-3-2005 cannot be applied. The said notification can be applicable only in cases where the activity of the service provider does not amount to “manufacture” within the meaning of clause (f) of section 2 of the Central Excise Act, 1944 (1 of 1944).

5. All pending issues including the show cause notices issued in this regard may be decided accordingly.

15 25.7 I also place reliance on the judgment of the Hon’ble CESTAT in the case of Commissioner of C.Ex., Nagpur V/s Solar Explosives Ltd reported at 2011(21) STR 448 (Tri.Mumbai) wherein it is held that “In the facts of this case it is found that the activity of the process of crimping and soldering carried out by the respondent on the inputs like PVC coated GI wires, Aluminum Filled Shells, Fuse heads etc. supplied by its principal results in to manufacture of distinct and new product namely detonator and therefore it does not fall under the purview of Business Auxiliary Services And once it does not fall under the BAS, availing of exemption under Notification No. 8/05 does not arise. Hence, the decision of Sterlite Industries (I) Ltd. is squarely applicable to the facts of this case. Hence, I do not find infirmity in the impugned order and the same is upheld. Appeal filed by the Revenue is rejected in the above terms.”

26. In view of this, demand of Rs.68,38,825/- raised vide SCN No.STC/4-2/O&A/12-13 dated 20.4.2012 is not sustainable on merits. When the demand of service tax fails, the question of charging interest and imposition of penalty is not warranted.

27. In view of the above findings, I do not find it necessary to discuss other contentions made as well as the contention with regard to limitation and invoking of extended period.

28. Accordingly, I pass the following order:

O R D E R

I drop the proceedings initiated against Deep Industries Limited, 6th Floor, Astron Tower, Opp Fun-Republic Cinema, S. G. Highway, Ahmedabad – 15 vide SCN F.No.STC/4-2/O&A/12-13 dated 20.4.2012.

(Tejasvini P. Kumar) Commissioner Service Tax, Ahmedabad

F. No. STC/4-2/O&A/12-13 Date: 04.07.2013

By R.P.A.D / Hand Delivery

To, M/s Deep Industries Limited, 6th Floor, Astron Tower, Opp. Fun Republic Cinema, S.G.Highway, Ahmedabad – 15.

Copy to:

1. The Chief Commissioner, Central Excise, Ahmedabad Zone, Ahmedabad. 2. The Deputy/Assistant Commissioner, Service Tax, Division-II, Ahmedabad. 3. The Superintendent, Service Tax, Range-IX, Division-II, Ahmedabad. 4. Guard file.

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