The Central Excise and Service Tax Appellate Tribunal (CESTAT), Hyderabad, has clarified a critical boundary in indirect tax law: when job work constitutes manufacture of excisable goods, it cannot be taxed as a service under the Finance Act, 1994, regardless of how the payment structure is framed. This decision reinforces the principle that the nature of the transaction, not its form, determines taxability.
Background & Facts
The Dispute
M/s Teena Labs Ltd (the appellant) entered into a job work agreement with M/s Aurobindo Pharma Ltd (APL) to manufacture bulk drugs and pharmaceutical formulations using APL’s raw materials. The appellant provided its manufacturing facility, manpower, and operational infrastructure to carry out the conversion process as per APL’s specifications. The department assessed service tax on the transaction, classifying it as "Renting of Immovable Property Services" (RIPS) under Section 65(105)(zzzz) of the Finance Act, 1994, and also sought to include reimbursed expenses in the taxable value.
Key Facts
- The appellant manufactured excisable goods on behalf of APL using APL-supplied raw materials
- The agreement stipulated fixed monthly conversion charges of Rs. 23 lakhs for the first 12 months and Rs. 25 lakhs thereafter
- APL was liable to pay any excess conversion charges incurred by the appellant beyond the fixed amount
- The appellant bore all costs related to power, fuel, water, filter pads, and machinery maintenance, which were reimbursed by APL
- The appellant employed its own workers, paid their salaries, and maintained quality control and compliance with pollution norms
- The appellant was prohibited from undertaking any other manufacturing activity during the contract period
- No separate agreement for renting of premises, plant, or machinery existed between the parties
- Finished goods were cleared by the appellant under job work provisions, without payment of Central Excise duty
Procedural History
- 28.02.2013: Commissioner of Central Tax, Hyderabad-IV, passed Order-in-Original No. 01/2013-Adjn. (Commr) ST, levying service tax of Rs. 1.89 crores and imposing penalties under Sections 76 and 78 of the Finance Act, 1994
- 26793/2013: Appeal filed by M/s Teena Labs Ltd before CESTAT, Hyderabad, on grounds that the activity amounted to manufacture and was exempt from service tax
- 05.01.2026: Hearing conducted before the Division Bench of CESTAT
- 30.04.2026: Final Order passed allowing the appeal
Relief Sought
The appellant sought: (1) setting aside of the impugned order dated 28.02.2013; (2) deletion of service tax demand; (3) cancellation of penalties under Sections 76 and 78; and (4) declaration that the activity was not taxable as RIPS or BAS.
The Legal Issue
The central question was whether the activity undertaken by the appellant - manufacturing excisable goods on behalf of APL under a job work arrangement - constitutes a taxable service under "Renting of Immovable Property Services" or "Business Auxiliary Service", or whether it falls outside the scope of service tax as it amounts to manufacture under the Central Excise Act, 1944.
Arguments Presented
For the Appellant
The appellant argued that the activity was unequivocally manufacturing, as defined under Section 2(f) of the Central Excise Act, 1944, and therefore excluded from service tax under Section 65(19)(e) of the Finance Act, 1994, which explicitly excludes production or processing that amounts to manufacture. It relied on multiple precedents including JB Mangharam Foods Pvt Ltd, Bagga Distilleries, and Jubilant Industries, all holding that when the essence of the transaction is manufacture, it cannot be reclassified as a service. It further contended that reimbursed expenses for power, fuel, and maintenance are not part of the taxable value under Intercontinental Consultants & Technocrats Pvt Ltd, and that penalties under Sections 76 and 78 cannot be imposed simultaneously.
For the Respondent
The department contended that the agreement, by virtue of fixed monthly payments and reimbursement of overheads, resembled a rental arrangement where APL effectively took over the entire factory premises, plant, and machinery. It argued that the payment structure was not typical of job work and that the appellant’s role was merely that of a facility provider. It maintained that the activity fell under RIPS and that reimbursed expenses formed part of the gross value of service.
The Court's Analysis
The Tribunal conducted a detailed examination of the agreement and the nature of the transaction. It emphasized that the classification of a service must be based on the substance of the transaction, not its form. The Court noted that the appellant retained control over its workforce, bore operational risks, and was responsible for quality assurance and regulatory compliance - all hallmarks of a manufacturer, not a landlord.
"It cannot be said that APL has taken over the entire facility of the appellant on rent along with machinery, manpower, raw material, associate services, etc."
The Tribunal rejected the department’s reliance on the payment structure as determinative, citing Senairam Doongarmall v. CIT and Ambalal Chauhan v. CCE & ST, which hold that the character of payment is determined by the nature of the transaction, not the method of invoicing or accounting. It further observed that the agreement contained no clause for renting immovable property and that the fixed and variable charges were directly linked to the cost of conversion, not to the use of premises.
The Court also relied on Jubilant Industries, which established the foundational principle that the same activity cannot be taxed both as manufacture under the Central Excise Act and as a service under the Finance Act. The exclusion of manufacture from Business Auxiliary Services under Section 65(19)(e) was deemed deliberate and unambiguous.
Regarding reimbursed expenses, the Tribunal applied Intercontinental Consultants & Technocrats Pvt Ltd, holding that such reimbursements, being cost recoveries and not consideration for a service, cannot be included in the taxable value.
The Verdict
The appeal was allowed. The impugned order dated 28.02.2013 was set aside. No service tax is payable on the conversion charges or reimbursed expenses. Penalties under Sections 76 and 78 of the Finance Act, 1994, were cancelled. The Tribunal held that the activity constituted manufacture and was excluded from service tax liability.
What This Means For Similar Cases
Manufacture Trumps Payment Structure
- Practitioners must argue that the nature of the activity - not the invoicing pattern - determines taxability
- Fixed or variable charges tied to production costs do not convert manufacturing into renting
- Reimbursement of utilities and overheads cannot be treated as part of the taxable service value
Job Work Agreements Are Protected
- Agreements explicitly labeled as job work, with raw material supplied by the principal, are presumptively manufacturing
- Prohibitions on undertaking third-party work do not negate the job worker’s role as manufacturer
- Quality control and compliance obligations retained by the job worker reinforce the manufacturing character
Penalties Cannot Be Imposed Arbitrarily
- Where the underlying tax demand is invalid, penalties under Sections 76 and 78 cannot be sustained
- Assessing officers must demonstrate willful evasion or misrepresentation; mere disagreement on classification is insufficient
