CESTAT: Pharma Job Work Arrangement Not Taxable As ‘Renting of Immovable Property Service’; Reimbursed Expenses Also Not Liable To Service Tax

April 30, 2026 : The Hyderabad Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that a pharmaceutical manufacturing arrangement carried out on job work basis cannot be reclassified as “Renting of Immovable Property Service” merely because the principal manufacturer exercised control over production standards or reimbursed operational expenses incurred by the job worker.

A Bench comprising Judicial Member Angad Prasad and Technical Member A.K. Jyotishi allowed the appeal filed by Teena Labs Ltd. and set aside the service tax demand raised by the department under the category of “Renting of Immovable Property Service”.

The dispute arose after Teena Labs entered into an agreement with Aurobindo Pharma Ltd. for manufacturing pharmaceutical products at its facility on job work basis. Under the arrangement, Aurobindo Pharma supplied raw materials while Teena Labs carried out manufacturing using its own infrastructure and workforce. The agreement provided for conversion charges of Rs.23 lakh per month for the first year and Rs.25 lakh per month for the remaining period, along with reimbursement of expenses such as power, fuel, water, machinery maintenance and employee salaries.

The department alleged that the agreement effectively amounted to renting out the factory premises, land, plant and machinery to Aurobindo Pharma for its exclusive use and therefore attracted service tax under Section 65(105)(zzzz) of the Finance Act, 1994. The adjudicating authority treated the monthly payments and reimbursements as rental consideration rather than conversion charges.

Before the Tribunal, Teena Labs argued that the activity admittedly amounted to manufacture within the meaning of Section 2(f) of the Central Excise Act, 1944 and therefore stood excluded from taxable service under “Business Auxiliary Service”. The appellant further contended that the manufacturing activity was undertaken by its own employees and not by Aurobindo Pharma. Reliance was placed on earlier Tribunal rulings including JB Mangharam Foods Pvt. Ltd. v. Principal Commissioner CGST & CE and Bagga Distilleries Hyderabad Pvt. Ltd. v. Commissioner of Central Tax.

Accepting the appellant’s contentions, the Tribunal observed that there was no dispute that the activity undertaken by Teena Labs amounted to manufacture of excisable goods. The Bench noted that the agreement specifically required the appellant to undertake conversion work, employ workers, pay salaries and comply with statutory obligations including pollution control norms.

The Tribunal held that although Aurobindo Pharma exercised effective control over production processes and quality standards, such control did not establish that the factory premises had been leased out on rent. The Bench observed:

“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.”

Referring to prevalent practices in the pharmaceutical sector, the Tribunal further noted that loan licence and conversion-based manufacturing arrangements are common in the industry and cannot automatically be treated as rental transactions merely because the principal manufacturer supplies raw materials or reimburses expenses.

The Bench also rejected the department’s reliance on the structure of payments. It held that the nature of a transaction must be determined from its substance and not merely from the manner in which payments are made. Reliance was placed on the decisions in Ambalal Chauhan v. Commissioner of Central Excise & Service Tax and Senairam Doongarmall v. Commissioner of Income Tax.

The Tribunal additionally held that reimbursable expenses could not independently be subjected to service tax in view of the Supreme Court judgment in Union of India v. Intercontinental Consultants & Technocrats Pvt. Ltd.

Holding that the arrangement was essentially one for manufacture of pharmaceutical products on job work basis and not for renting out factory premises, the Tribunal concluded that no service tax was payable under “Renting of Immovable Property Service”. The Bench further observed that even if the activity were examined under “Business Auxiliary Service”, it would still stand excluded since the activity admittedly amounted to manufacture of excisable goods. Consequently, the service tax demand and penalties were set aside.

Case Title: Teena Labs Ltd. v. Commissioner of Central Tax, Medchal-GST
Case No.: Service Tax Appeal No. 26793 of 2013
Coram: Angad Prasad (Judicial Member) and A.K. Jyotishi (Technical Member)