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Processes that do not amount to manufacture attract service tax'
April, 19th 2016

We are merchant exporters. We bring shrimps from our own farm, give it to ABC factory, where they are cleaned, graded, frozen and packed (processed) using their facility and manpower. For that we pay them on the basis of weight every month. We call this a processing charge or fee. We export the processed shrimp in our name and get payment in foreign currency. Do the processing charges that we pay on monthly basis to ABC
factory attract service tax?

Yes. In the case of Sterling Foods V. State of Karnataka [1986 (26) ELT 3 (SC), the Supreme Court held that processed or frozen shrimps, prawns and lobsters are not a new and distinct commodity but they retain the same character and identity as the original shrimps, prawns and lobsters. So, the processes carried out at the ABC factory do not amount to manufacture. Such activities are not covered in the negative list of services or under any exemption notification and so, will attract service tax.

Our manufacturing unit is registered with Central Excise. Sometimes we have to sell goods without processing. Is it alright to do so?

If you mean whether you can sell the inputs you have procured initially for your manufacturing activities, you can do so. If you had taken Cenvat Credit of the duties paid on the input, you have to pay it back, either by debit to Cenvat account or through e-payment.

The wrong excise number was mistakenly written on the purchase invoices of the last two years. Can we correct it?

Apparently, these are invoices issued by the parties who have sold the goods to you and so, you cannot correct them. At a practical level, you may let them be if they are only typographical errors, other particulars are correctly stated and there are no other revenue implications. You must be ready to explain the situation, if you are called upon to do so.

If I do not pay the full amount of my credit card and the interest is charged on the balance amount, can the credit card issuing bank impose service tax on the interest amount?

Para 4.14.10 of the CBEC Educational Guide on Taxation of Services deals with this issue in detail. Essentially, it says that loans and advances are meant to signify amounts contractually negotiated and not merely failure to pay an amount on the due date and that the exorbitant charges have no relationship with the prevailing interest for the same class of creditworthiness. They are in the nature of consideration for services rendered for using the convenience by way of a credit card, and hence taxable. In my view, penal interest for late payment is a consideration covered under 'agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act', which is a declared service under Section 66D (e) of the Finance Act, 1994 and hence, chargeable to service tax.

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