CESTAT Hyderabad Says Pharma Job Work Was Not Renting Service Merely Due To Client's Production Control

The Hyderabad Bench of the Customs, Excise & Service Tax Appellate Tribunal (CESTAT) has held that the job work arrangement between Teena Labs Ltd. and Aurobindo Pharma Ltd. could not be treated as “Renting of Immovable Property Service” merely because Aurobindo Pharma exercised production and quality control and reimbursed various expenses.

The tribunal observed that, “Thus, what is apparent is that there is an effective control on production process, quality control, etc., however, 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.”

A coram of Judicial Member Angad Prasad and Technical Member A.K. Jyotishi passed the ruling while allowing an appeal filed by Teena Labs Ltd against a service tax demand confirmed by the department.

Teena Labs, engaged in the manufacture of bulk drugs and formulations, had entered into an agreement with APL to manufacture pharmaceutical products at its facility on a job-work basis.

APL supplied the raw materials, while the job work activity was undertaken by workers employed by Teena Labs. The agreement provided for fixed conversion charges along with reimbursement towards power, fuel, water, machinery maintenance, and employee salary expenses.

The department alleged that the arrangement was effectively a case of renting out the appellant's premises, plant and machinery for Aurobindo Pharma's exclusive use and sought to levy service tax under “Renting of Immovable Property Service”.

Teena Labs argued that the activity amounted to manufacture under Section 2(f) of the Central Excise Act, 1944 and therefore stood excluded from taxable service.

After examining the agreement, the tribunal noted there was no dispute that the appellant was carrying out manufacturing activity as a job worker and that the activity amounted to manufacture of excisable goods. It observed that the appellant undertook conversion work, employed workers, paid salaries and remained responsible for statutory compliances.

The bench said, “The mode of payment is based on various factors including reimbursement of certain expenses, however, it is also apparent that manpower belonged to the appellant, who is paying salary, though they were also getting reimbursed for that also.”

Referring to pharmaceutical industry practices, the Tribunal observed, “Normally, in the pharmaceutical industry, there is a concept of loan license, where another manufacturer manufactures medicine for the license holder and is paid lump sum amount towards conversion charges.”

It further held, “In some cases, the basic ingredients and active ingredients are supplied by the principal manufacturer to the job worker for conversion. In this model, it is improper to allege that the entire factory has been taken on rent by the principal manufacturer.”

The Tribunal reiterated that, “production or processing of goods for, or on behalf of, another is a taxable service, however, if such production or processing of goods amounts to manufacture, then such activity would be excluded from the scope of levy of Service Tax.”

Setting aside the demand, the tribunal held that the activity could not be classified as “Renting of Immovable Property Service” and that no service tax was payable. It also held that the penalties imposed on Teena Labs could not survive.

For Appellant: S. Thirumalai, Advocate

For Respondent: M. Anukathir Surya, AR