A circular (F.No.232/2/2006-CX.4) now proposed to be issued by the Central Board of Excise and Customs in regard to the applicability of service tax on activities undertaken at open cast mines has raised the fundamental issue of whether mining activity is manufacture or service. The circular observes that taxable service, namely Business Auxiliary Service, includes activities which are in the nature of production or processing of goods for or on behalf of the client, provided any such activity does not amount to manufacture within the meaning of Section 2 (f) of the Central Excise Act, 1944.
In the instant case, the contractors undoubtedly produce coal for their clients, namely the coal companies. Further, extraction of coal is not a process amounting to manufacture within the meaning of Section 2(f) of the Central Excise Act. Therefore, such an activity would fall under the purview of Business Auxiliary Service.
So the hypothesis is that the activity of the contractors for open cast mining (which involves deployment of labour and machinery for breaking and extraction of coal, conversion of coal layers/starter into lump size, etc) is production and not manufacture; and therefore is a service falling within the purview of the taxable service called Business Auxiliary Service. This hypothesis that this activity is not manufacture is wrong for the following reasons:
(A) Coal was an excisable item in the central excise tariff in mid-1970s. The Ministry of Finance would never have made coal excisable if it was not excisable. Even now coal is a specific entry in Chapter 2701.
(B) The production of coal has been held as covered under Entry 84 of List 1 of the Seventh Schedule of the Constitution in several judgements [Aluminium Corporation of India Ltd vs Coal Board AIR1959 Calcutta 222 (DB)]
(C) Production and manufacture cannot be distinguished for Entry 84. Some differences have been admitted by some High Courts but all High Courts have agreed that both production and manufacture have been used in juxtaposition in the Constitution. Both production and manufacture result in marketable goods. But in the case of production, one begins with goods not quite marketable or reachable which with human labour are brought into marketable state fit for human consumption. However, in the case of manufacture, raw material is transformed into different product altogether, again a marketable one. Both these concepts together define the scope of Entry 84 [Hyderabad Asbestos Cement Products Ltd vs U.O.I 1980(6) ELT 735(Del) and Corpus Juris Secundum Vol.55 page 657 and Vol.72 page 1208]. The Supreme Court [Empire Industries case-1985(20)ELT179(SC)] has elaborately discussed the content of Entry 84, which mentions manufactured or produced in India. It has approvingly quoted para 17 of the judgement of the Calcutta High Court in the case of Aluminium Corporation of India (supra) almost verbatim to come to the conclusion that in this case the grey fabrics subjected to printing, dyeing, mercerising, etc. could even be called produced, if not manufactured, and so covered under Entry 84. This judgement has also been further approved by Higher Bench in the Ujagar Prints [1987 (27)ELT 567(SC)].
(D) The use of the word production in the definition of Business Auxiliary Service is incorrect. The expression used is production or processing of goods for or on behalf of the client. This was inserted by Finance Act, 2004 wef 10.9.2004.
(E) The conclusion in the circular that the transport of coal in both the cases, within mines and outside mines, is in the nature of transport of goods by road is also incorrect.
The conclusion is that while expanding the scope of service tax, the government should not overstep on the scope of manufacture. And this circular should not be issued without amending as suggested here.