Packing is manufacturing or services?

Queries on taxation and service tax liabilities, addressed by Amit Bhagat & Jayanta Kalita of Ernst & Young

Our company manufactures pharmaceuticals in a controlled environment with measured humidity and temperature. We have engaged a contractor for packing the products. The packing is done on our machines and the vendor is merely supplying manpower. The vendor is registered under the category of 'packing activity services'. Recently the vendor received a notice from the authorities demanding service tax. Is the vendor liable to charge service tax for such services?

Packing services attracted service tax under the taxable category of 'packing activity services'. However, any activity that amounts to manufacture was not covered within the ambit of the taxable category.

In the present case, the authorities have issued a notice under the packing activity services category. Therefore, the vendor would be required to substantiate that the activity of packing of pharmaceuticals amounts to manufacture. In a similar case of Assistant Collector of Central Excise, Guntur vs. Andhra Fertiliser Ltd. the Supreme Court held that the manufacture of fertilisers would be complete only upon loading them into bags, which would make it marketable. The Supreme Court held that without the packing activity the fertilisers would not be marketable.

The definition of 'manufacture' includes activities incidental or ancillary to the manufacture of goods. Therefore, in the present case the vendor would be required to substantiate that the activity of packing of pharmaceutical products is incidental or ancillary to the manufacturing activity. If the vendor is in a position to substantiate that the packing activity renders the product marketable and amounts to manufacture, he would not be required to charge service tax. However, it is pertinent to note that this position is only applicable to the taxable category of 'packing activity services'.

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