Service Tax | Pairing & Testing Smart-Cards For Set-Top-Boxes Qualifies As Job Work: Bombay High Court Allows Credit

A Division Bench comprising, Justice Vibha Kankanwadi and Justice Hiten S. Venegavkar dismissed the appeal filed by the Service Tax Department against order by the Mumbai, Customs, Excise and Service Tax Appellate Tribunal (CESTAT) that after verifying accounting records held in favour of Dish TV. The Bombay High Court, while holding that 'no substantial question of law arose' affirmed Tribunal's finding that mere smart-card pairing with Set Top Boxes lacks the element of manufacturing. Thus the Bombay High Court observed that 'Pairing and Testing Smart Cards' with Set Top Boxes qualifies as "job work" under Rule 2(n) of CENVAT Credit Rules, 2004, as it completes essential processes for DTH broadcasting services.

Further, the Bombay High Court reckoned that

“There is no dispute regarding the facts, in a way that though the smart cards were imported, yet they were not inserted in the Set Top Boxes as it is……The testing and pairing was only with a view to see whether they are suitable for the customer i.e. the end user. There is no manufacturing activity carried out by M/s. Trend Electronics Limited, as aforesaid. It has been rightly observed by the Tribunal that the basic objective behind allowing Cenvat Credit on inputs, input services or capital goods is to provide instant credit of duties/taxes paid thereon and consequential reduction in the cost.”

Dish TV India, was providing broadcasting services to their customers. It was required to provide and install various Customer Premises Equipment (CPEs) to the subscribers of Broadcasting Services. The various equipment that the it would install at the premises of the subscribers/customers as part of the CPEs, include the Set Top Boxes (STB), Smart Cards, Dish Antenna, Cables, Low Noise Block Down Converter and other accessories, which collectively constituted as CPEs.

For the purpose of rendering the broadcasting service, they procure STBs, manufactured domestically in India and import smart cards from the overseas suppliers located abroad. These imported Smart-Cards were tested and paired with the STBs.

During the manufacture of STB, Dish TV was sending smart cards free of cost to the STB manufacturer on job work basis. Upon completion of the process of pairing, the STBs were dispatched by the STB manufacturer to various warehouses of Dish TV. Dish TV paid appropriate Customs Duty on the import of smart cards and availed CENVAT Credit in terms of the CENVAT Credit Rules, 2004.

However, for the period September 2016 the Service Tax Department found that no job-work avtivity was involved in the process of inserting the Smart-Cards into the STBs. The Department alleged wrongful availment and non-payment of CENVAT Credit amount on the Smart-Cards.

A Show Cause Notice for reversal of Rs.42,19,49,134 during the period from January 2014 to June 2017 was issued.

On the aspect of availment of CENVAT credit, the Bombay High Court explained how Rule 2(n) had to be read in conjunction with Rule 4(5)(a) (i) of the CENVAT Credit Rules, 2004. Therefore, the operations of testing and pairing of the smart card with the STBs would be covered under the phrase “processing, testing or any other purpose. mentioned under Rule 4(5)(a) thus fulfilling the requirement of removal of inputs for job work.

Re-iterating that “Job work per se may or may not lead to manufacture” since mere barcode pairing of smart card would not tantamount to manufacturing, the Bombay High Court noted technical necessity for completing the Conditional Access System.

Accordingly, the Bombay High Court dismissed the appeal filed by the Department.

Case Name: Commissioner of Central GST vs. Dish TV India Limited (Formerly known as Videocon D2H Ltd.)

For Appellant: Advocates D.S. Ladda

For Respondent: Advocate A.R. Madhav Rao, Mukund Rao, Krishna Rao

Clickhere to read the order.