[2009] 22 STT 93 (AHD. - CESTAT)

CESTAT, AHMEDABAD BENCH

Commissioner of Service Tax, Ahmedabad

v.

Identity Communication (P.) Ltd.

MRS. ARCHANA WADHWA, JUDICIAL MEMBER

AND B.S.V. MURTHY, TECHNICAL MEMBER

ORDER NOS. A/57-58/WZB/AHD./2009

IN APPEAL NOS. ST/227 OF 2005 AND ST/CO/137 OF 2006

JANUARY 7, 2009

 

Section 65(3) of the Finance Act, 1994 - Advertising agency - Whether where assessee prepared tableau for State Government and State Government exhibited same and after tableau was prepared, assessee had no role to play, assessee would not be covered under purview of term ‘Advertisement agency’ - Held, yes [Para 5]

CASE REVIEW

Star Neon Sign v. CCE [2007] 7 STT 223 (New Delhi - CESTAT) (para 5) followed.

CASES REFERRED TO

Prithvi Associates v. CCE [2005] 2 STT 149 (Mum. - CESTAT) (para 2) and Star Neon Sign v. CCE [2007] 7 STT 223 (New Delhi - CESTAT) (para 3).

S.R. Prasad for the Appellant. Vipul Kandhar for the Respondent.

 

 

 

 

 

Allowability of rebate claim for services exported under Export of Service Rules, 2005

 

Once the taxable service is exported and various input services have been utilized for providing the output service the service provider is entitled for the rebate, which is equal to the service tax paid on the input services.

 

CESTAT, SOUTH ZONAL BENCH, BANGALORE

Dell International Services India Pvt. Ltd.

v.

CCE (Appeals)

Appeal Nos. ST/115/2008 & ST/145-146/2008

June 23, 2009

RELVANT EXTRACTS:

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11.   We have gone through the records of the case carefully. In respect of Appeal No. ST/115/2008, the rebate has been rejected on the ground that the service exported Is not taxable. However, in the other appeal it has been, held that they are taxable. Only with regard to some of the input services, the Commissioner (Appeals) in his order had expressed certain doubts as to their entitlement for credit and remanded the matter to the Original Authority. Both the orders are under challenge. In terms of the agreement entered by the appellant, the following services are provided to the recipients situated abroad:

a)   Call centre services including technical support, customer care contact services and sales facilitation services

b)       Back office accounting and transaction processing

c)        And IT support services of remote maintenance, trouble shooting, catering to Dell's group companies outside India and their overseas customers.

11,1. According to the appellants, the above services would qualify to be Business Auxiliary Services. In any case, in the light of the' Board'sclarification dated 21.08,2003. the above services cannot be categorized under "Information Technology Service" and excluded from the scope of "Business Auxiliary Service." The extract of the Board's Circular is reproduced here:

"2. Scope of IT service under Business Auxiliary Service:

2.3.       It is clarified that there is no contradiction between the clarifications dated 28.02.2003 and dated 20.06.2003. The scope of IT services is explained in the definition of Business Auxiliary Service in the Act itself as  any service  in  relation  to designing,   developing or maintaining of computer software or computerized data processing or system networking or any other service primarily in relation to operation of computer systems. The last words "primarily in relation to operation of computer systems" make the intention abundantly clear  The words "back office processing" used In the clarification dated 28.02.2003 have to be read in conjunction with the other terms used therein viz. data processing,  networking,   computer facility management   Thus, any sen/ice of back office processing primarily in relation to operation of computer system will be covered as IT services and not taxable. Payroll processing, accounts management etc. even by  using  computer programs, cannot be termed as activities primarily in relation to computer systems. The use of computer in these services is secondary and the primary activity is that of business-related WOCK. Thus, these services will be taxable as Business Auxiliary Ser/ices. This is exactly the position that has been clarified in the circular dated 20.05.2003."

12.    In any case, the Commissioner (Appeals) in the orders 83 & 83A/2008 ST had already stated that the service rendered by the appellant and exported are taxable services, it is also not in dispute that the appellants utilized the various inputs services, which had already been enumerated in the submission of the appellants. Once the taxable service is exported and various input services have been utilized for providing the output service :"i.e. appellants could be entitled for the rebate, which is equal to the service tax paid on the input services. Going by the definition of the "input service" under Rule 2(1) of the Cenvat Credit Rules, 2004 the service utilized by the appellants for providing output service can indeed be considered as input services. We also take note that the definition of "input service" indicates that the interpretation should be done in a liberal way in view of the phrase "activities relating to business", there cannot be any dispute that the input services rendered by the appellants are all activities relating to the output services exported by the appellant. Moreover, on going through the records^ we are satisfied that the appellants had fulfilled the five conditions of Notification No. 12/2005 already enumerated in the submission of the appellants these circumstances, the impugned orders do not have any merit. The appellants are entitled for the rebate in respect of all the rebate claims filed by them during the relevant period. In view of the above findings we allow the appeals with consequential relief.

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Scope of business auxiliary service rendered by a CA firm for carrying out spot billing and data processing for a Power Distribution Company (APCPDCL) prior to 2006

In terms of the Board’s clarification dated 28-2-2006, the service rendered namely outsourcing of spot billing work by APCPDCL would come within the ambit of business support service which is liable to service tax only with effect from 2006.

CESTAT, SOUTH ZONAL BENCH, BANGALROE

Gandhi & Gandhi Chartered Accountants

v.

CCE

Appeal No. ST/332/08

March 12, 2009

RELEVANT EXTRACTS:

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13.    We have gone through the records of the case very carefully. The active carried out by the appellant is mainly spot billing and data processing for the APCPDCL. The appellants have clearly shown that during the relevant period, the services would come within the category of information technology service and they would be specifically excluded from the scope of business auxiliary  service by way of explanation to section 65(19). They have relied on the decision of this Bench in the case of Dataware Computers vs. Commissioner of Central Excise Customs & Service Tax (Guntur) wherein it is held that computerized data processing falls within the realm of information technology service and consequently it is excluded from the category of business auxiliary service. In that case also, the activity carried by the appellant was similar. Again in the case of Bellary Computers vs. Commissioner of Central Excise also a similar activity was subject matter of the appeal and it was held that supply of computers, printers, hardware items generation of MIS reports and data processing would fall within the category of business auxiliary service. There was an amendment to section 65(15) with regard to the explanation on the scope of the information technology service which was amended and till 1-5-2006 as a consequence of the amendment the said service would be excluded from the scope of business auxiliary service. The appellants had taken pains to show that during the relevant period the activity carried out by them would not fall within any of the sub-categories of business auxiliary service. On this there is no discussion by the Commissioner in the impugned order. Only a bald statement that the said service comes under business auxiliary service has been made. Again our attention was also invited to the Board’s Clarification 28-2-2006 wherein it is clearly stated that services provided on behalf of the appellant would be falling under the business auxiliary service. Appellants here are directly rendering service to APCPDCL. They are not the agents of APCDPCL. Therefore in terms of even the Board’s Clarification the services rendered namely outsourcing of spot billing work by APCPDCL would come within the ambit of business support service which is liable to service tax only with effect from 2006. the period in the present case pertains prior to that. Moreover there is no justification for invocation of the extended period. The appellant has made out a very strong case to show that the services rendered by them would not fall within the category of business auxiliary service during the relevant period. In view of this we are inclined to allow the appeal with consequential relief. The impugned order is set aside. Thus the appeal is allowed.

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Levy of service tax on freight forwarding services under CHA Services

 

The activities relating to freight forwarding cannot be brought under CHA.

 

CESTAT, SOUTH ZONAL BENCH, BANGLAORE

DHL Lemuir Logistics Pvt. Ltd.

v.

Commissioner of Service Tax

Service Tax Appeal No. 389/2007

June 29, 2009

RELEVANT EXTRACTS:

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6.      We have gone through the records of the case carefully. The appellants had furnished a flow chart indicating the activities undertaken by them. It is seen that the activities in Sl. No. 1 to 6 related to activity of the appellants as freight forwarding. This has been clearly explained by the appellant in the submissions. The point urged was that the appellants are engaged in three distinct activities:-

 

(i) Freight forwarding                                           

(ii) Customs House Agent (CHA)                                       

(iii) Clearing & Forwarding Agent (CFA)

We are of the considered opinion that the activity relating to one of the categories could not be subjected to service tax under other category. In other words, the activities relating to Freight forwarding cannot be thought under CHA. The appellants had clearly explained the nature of the charges collected such as Charge Collect fees, Break bulk fees, Profit share from margin Unallocated income, Currency adjustment factor, Air/sea Freight rebate, Commission/ Brokerage, Air freight incentive, Expenses reimbursement billing, etc. We do not want to repeat the same in the findings here. Suffice to say, such charges would not be includable in ^the computation of the service tax towards CHA services. However, the Commissioner in the impugned order even while holding that these charges relate to CHA services, had also repeatedly pointed out that the appellants had not produced a Chartered Accountant's Certificate with regard to the various deductions claimed by them. Hence, while holding that the above charges cannot be included in the value of CHA services, we remand the matter to the Original authority to re-examine the issue after giving an opportunity to the Appellants to produce the Chartered Accountant's Certificate in respect of the various deductions claimed by them including the reimbursement. We have also examined the scope of the .Customs House Agent (CHA) as defined in the CHA Regulation, 20Cl4. This cannot be ignored-even in the matter pertains to service tax fees observed to the contrary by the Commissioner in the impugned order. We have clearly held after going through the definition of CHA in the case of Bax Global India Ltd. Vs. Commissioner of Service Tax, Bangalore [2008 (9) S.T.R. 412 (Tri. - Bang.)] that the activity of CHA relates to entry or departure of conveyances or import or export of goods at any customs station. Therefore activities of CHA is limited to customs station and it cannot extend beyond it. For sample, in the present case, the appellants collected air freight for export from the consignee. This activity relates to freight charges collected for transportation service rendered by .airliner In other words, this freightforwarding cannot be said to be activities of Customs House Agent (CHA). In a similar manner, each charge ought to have been examined by the Commissioner. This has not been done. Moreover the commissioner has confirmed exactly the same amount confirmed in his first Order-in-Original which was set aside by this Bench. The demand of service tax on transportation under the category of CFA is not correct' in the light of the Various case laws cited by the appellants. The various reimbursement of the taxable services relating to CHA in terms of even i.e. Board's Circular dated June 6, 1997. In these circumstances, even the de novo order suffers from various defects. In the impugned order, the Adjudicating authority has stated that the assessee did not furnish complete accounts duly certified by a Chartered Accountant.   Hence we have no other option but to remand the matter to the Original authority once again for deciding the matter only in respect of the computation of the liability after providing an opportunity to the appellants to produce the Certificate from the Chartered Accountant in respect of every deduction claimed by them.  As regards the demand under CFA services, the appellant had made a strong case for non includability of Rental Income, distribution charges, warehousing and transportation. Such charges are collected under separate contracts. They do not represent the charges for CFA services. The case laws relied on are squarely applicable. The commission received by CFA is only subject to service. As regards the includability or non-includability of the various-charges, we have already given our findings in this order. That should be borne in mind by the Adjudicating authority. With these observations, we remand the matter to the Original authority for re-computation of the liability. Needless to say that the appellants would cooperate with the Adjudicating authority in providing the Chartered Accountant's Certificate in respect of the deductions  claimed by them including the erroneous inclusion of the Value of CHA services in the computation of the tax liability in the CFA services. The de novo order should be issued within a period of four months from the date of receipt of this order.  The impugned order is set aside and the appeal is allowed by way or remand.

 

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Rendering of “Technical Inspection and Certification Service” in terms of section 65(108) of Finance Act, 1994

The word ‘process’ mentioned in the definition of ‘Technical Inspection and Certification Service’ could relate only to physical and chemical processes; it cannot be transported to the province of management relating to human beings.

CESTAT, SOUTH ZONAL BENCH, BANGALORE

American Quality Assessors (India) Pvt. Ltd.

v.

Assistant Commissioner (Service Tax)

Appeal No. ST/73/2005

June 23, 2009

RELEVANT EXTRACTS:

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5.       We have gone through the records of the case carefully. The issue to be decided is whether the activity carried out by the appellant would fall within the category of taxable service namely 'Technical Inspection and Certification Agency' in terms of Section 65 (108) of the Finance Act, 1994. The relevant statutory provisions are- as follows:

"Technical inspection and certification' means inspection or examination of goods or process or material or any immovable property to certify that such goods or process or material or immovable property qualifies or maintains the specified standards, including functionality or utility or quality or safety or any other characteristics or parameters, but does not include any service in relation to inspection and certification of pollution levels."

 

5.1     The appellants has given a flow chart indicating the activities carried out by them for certificate of quality management system practiced by the clients, the same is reproduced below.

FLOV/ CHART OF ACTVITIES CARRIED OUT BY AQA qNDIA) FOR

CERTIFICATE OF DUALITY MANAGEMENT SYSTEM PRACTICED

BY CLIENTS AS PER ISO / lEC GUIDE 62 : 1996

 

AQA (I) receives the Company information Sheet (CIS) from prospective clients. AQA (I) reviews the CIS. Prepares quotation and sends it to prospective client. The client forwards the signed contract AQA (I), provides client with all information connected with, Quality Management Systems (QMS) Certification.
Client prepares the Quality Manual (QM) & procedures (QSP) in line with ISO 9001: 2000 generic Quality Management System requirement basing on his operational activities and implement them. This QM & QSP are forward to AQA (I) for review for its adequacy in meeting the ISO 9001:2000 requirement. Comments are sent to client on the documents, who will in turn submit the corrective action taken on AQA (I) comments, AQA (I) reviews the comments and manually accepted date is fixed for conducting certification audit.
During the certification audit, AQA (I) auditor audits the client's Quality Management System for compliance to their laid down Quality Manual documentation. In Case deficiency is noticed in the implementation of the system the audit highlights the same in the form of Non Conformance Report (NCR). On receipt of corrective actions taken by the client, the same are reviewed by AQA (I) for adequacy. <3n successful closure of the NCR, the audit pack is forwarded to AQA (USA) with a recommendation forward of certificates.
Role of AQA, USA
AQA (USA) reviews the audit findings in USA and puts up to their Registration Committee in USA for award of certificates. On approval by Registration Committee, the certificates will be awarded to the client and certificates contract is signed only between AQA. U'SA and the client. AQA (I) is not involved. In case Registration Committee does not quality the audit reports sent by AQA (1), them no certificates is awarded.
Periodical Surveillance audits are conducted by AQA (I) in order to monitor the continued implementation of Quality Management System by the client.

 

5.2     No doubt the appellant receives certain consideration for the services rendered by them. Without going into the nitty gritty, we can safely conclude that the activities of the appellant are pre-requisites for any client in India to obtain ISO certification. However, the certification relates only to management system or management processes. The Principles of Ejusdem Generis is clearly applicable in the interpretation of the word ‘process’ which is found in the definition of ‘Technical Inspection and Certification Service’. No doubt, the said word ‘process’ keeps company with the other words ‘goods or material or immovable property’. We are convinced that these inspections relates only to activities connected with matter. In other words, the ‘process’ mentioned in the definition could relate only to physical and chemical processes. They cannot be transported to the province of management relating to human beings. In other words, the activities carried out by AQA for certification of quality management system practiced by clients would not come within the purview of ‘Technical Inspection and Certification Services’. Further, we also find that the appellant has carried out the audit of quality of various schools and organizations. Obviously, these processes would not relate to matter or immovable property.    

5.3     The appellants have stated that on their own they had approached the department as early as 18-8-2003 with regard to the taxability of their services. However, the show cause notice dated 7-1-2005 has invoked the longer period, which is invoked for only suppression of facts, mis-statement or fraud with an intent to evade tax. In this case, the ingredients for invocation of longer period are not present. Hence, the longer period is not sustainable. In view of the above, there is no merit in the impugned order and the same is set aside. Thus, the appeal is allowed with consequently relief.

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[2009] 22 STT 105 (MP)

HIGH COURT OF MADHYA PRADESH, JABALPUR BENCH

Maa Sharda Wine Traders

v.

Union of India

DIPAK MISRA, K.K. LAHOTI AND RAJENDRA MENON, JJ.

WRIT PETITION NOS. 696-698 AND 700 OF 2008

MARCH 20, 2008

Section 65(76b) of the Finance Act, 1994, read with section 2(f) of the Central Excise Act, 1944 - Packaging activity - Period 2005-06 - Whether packaging and bottling of liquor comes within ambit and sweep of ‘manufacture’ within meaning of section 2(f) of 1944 Act and, therefore, will not attract service tax under section 65(76b) - Held, yes [Para 32]

Circulars and Notifications : CBEC Circular No. 249/1/2006, dated November 2006 and Circular F. No. 249/1/2006-CX4, dated 27-10-2008

FACTS

The assessee purchased bottles of country spirit from the licensees who were engaged in the manufacture and supply of country liquor in sealed bottles pursuant to the license issued by the competent authority of the State Government under the provisions of the M.P. Excise Act, 1915 and the Rules framed therein. The rectified spirit was manufactured by the process of distillation in the distillery. It was blended in the warehouses, bottled, sealed, labelled and was supplied to the retail contractors. The assessee was granted a bottling license in respect of the excise year 2005-06 for supply in respect of the areas mentioned therein. Service tax was demanded from the assessee for activity of bottling of liquor as packaging activity under section 65(76b). The assessee challenged the validity of said section in writ petition. In the course of hearing, the assessee contended that the Division Bench in Vindhyachal Distilleries (P.) Ltd. v. State of MP [2006] 5 STT 254 (MP) had not appropriately considered the decision rendered in case of Som Distilleries & Breweries (P.) Ltd. v. State of MP 1997 (1) JLJ 319 and various other aspects which deserved consideration. The Division Bench thought it apposite to refer the matter to a Larger Bench referring the question as to whether bottling of liquor amounts to manufacture of liquor or only packaging so as to attract service tax.

HELD

On a scrutiny of the definition of ‘packaging activity’, it is quite clear that packaging activity means packaging of goods including pouch-filling, bottling, labelling or imprinting of the package but the definition does not stop there, as the provision expressly shows that it does not include any packaging activity that amounts to manufacture within the meaning of clause (f) of section 2 of the 1944 Act. [Para 12]

In Circular No. 249/1/2006, it was mentioned that as alcohol beverages are not covered under the Central Excise Law, the production of beverages would not fall within the meaning of ‘manufacture’ as conceptualized under clause (f) of section 2. The Board re-examined the matter in detail after receipt of the response and issued Circular F. No. 249/1/2006-CX.4, dated 27-10-2008 which relates to levy of service tax on production of alcoholic beverages on job work basis. [Para 14]

The basic aspect of manufacture as contained in section 2(f) conveys that the term ‘manufacture’ would include ‘any process incidental or ancillary with the completion of manufactured product’. The definition clause further expands the scope of manufacture to include certain goods which are specified in the section. The first limb of the inclusive definition of the term ‘manufacture’ under section 2(f) has a very wide connotation. As the definition clause lays down an inclusive facet, the term ‘manufacture’ has to be construed in a natural and plain manner and would include any process incidental or ancillary to the completion of a manufactured product. Keeping in view the context in which the term ‘manufacture’ has been used, it would take in its fold the incidental or ancillary process in the manufacture or finishing of any manufactured product. It does not leave any room for doubt that an allied process should be an integral and inextricable part of manufacture for completeness and presentability of the manufactured product. [Para 15]

Section 65(76b) of the Finance Act, 1994 uses the expression ‘but it does not include’. Thus, it is a definition which has the inclusive as well as exclusive facet. By virtue of the same, it may include certain things and exclude others. It is a well-settled principle of law that a definition is not to be read in isolation and has to be read in the context of phrase which it defines, realising that the function of a definition is to give precision and certainty to the word or phrase which would otherwise be vague and uncertain. [Para 16]

In view of the aforesaid principle and the exclusionary facet in the Finance Act, though a limited one, it would exclude the manufacturing process as defined under section 2(f) of the 1944 Act. [Para 17]

Keeping in view the aforesaid definition clauses and circulars issued by the C.B.E.C., viz., Circular No. 249/1/2006, dated November, 2006 and Circular F. No. 249/1/2006-CX4, dated 27-10-2008, it is quite luminescent that the word ‘manufacture’ has to be understood in a broader sense and not to be confined or restricted to the excisable product in the Act. It would include all processes which amount to manufacture whether or not the final product is an excisable product. [Para 18]

Section 65(76b) of the 1994 Act while defining ‘packaging activity’ refers to the definition of ‘manufacture’ as contained in section 2(f) of the 1944 Act. Thus, in a way, it is referral legislation. [Para 19]

In view of the aforesaid enunciation of law, the non-exclusive part in the Finance Act has to be in the context of section 2(f) of the 1944 Act. At this stage, it is appropriate to note certain relevant aspects with regard to concept of ‘country liquor supply contract’. Such contracts are awarded only to distillers who are producers of rectified spirit. Under the Madhya Pradesh Country Liquor Rules, 1995, the distillers are given a CS-I licence to manufacture country spirit from rectified spirit by cleansing, colouring, flavouring, reducing, blending, etc., at the manufacturing warehouse. In the process of manufacturing of country spirit, the over proof spirit which is not potable is reduced to issuable strength, which is potable. Colouring and flavouring agents are added at the time of maturation. Thereafter, the liquor is supplied in sealed bottles to the retail contractors. This is the process of treatment given to over proof spirit in order to render it fit for human consumption in the form of country liquor. If the process is to be analysed, there cannot be any scintilla of doubt that the process involves manufacturing under the provision of section 2(f) of the 1944 Act. As per the 1995 Rules as well as clause (6) of the tender notice issued by the Excise Commissioner, dated 22-3-2005, it is mandatory for a distiller to supply country liquor in sealed bottles and not otherwise. [Para 20]

A reference could be made to the cases of Sir Shadilal Distillery & Chemical Works v. State of Uttar Pradesh [1998] 8 SCC 428, wherein the Apex Court after referring to the decision rendered inKhoday Distilleries Ltd. v. State of Karnataka [1996] 10 SCC 304, has expressed the view that bottling of liquor is an integral part of manufacture and supply thereof. [Para 22]

In view of the enunciation of law in the cases of Sir Shadilal Distillery & Chemical Works (supra) and Khoday Distilleries Ltd. (supra), whether an activity amounts to manufacture or not, it is incumbent to take note of any process which is incidental or ancillary to the completion of the final product whether the final product is excisable or not. This aspect has been clarified in the circular keeping in view the aforesaid decision rendered by the Apex Court. It is worth noting that the definition of the term ‘manufacture’ as contained in section 2(14) of the M.P. Excise Act, 1915 is an inclusive definition which covers every process whether incidental or artificial, by which an intoxicant is produced or prepared. The same has been taken note of by the earlier Division Bench of the Court in Som Distilleries & Breweries (P.) Ltd.’s case (supra). [Para 23]

In view of the aforesaid authorities, the closer scrutiny of the terms and conditions of tender notice relating to price and invoice by the Division Bench in Vindhyachal Distilleries (P.) Ltd.’s case (supra) for the purpose of excluding packaging of liquor from the spectrum of manufacturing process, was not correct. [Para 27]

The reasons for not excluding packaging of liquor from the spectrum of manufacturing process are as follows :

   (i)  Section 65(76b) of the 1994 Act by referral legislation excludes the manufacturing process as defined under section 2(f) of the 1944 Act and the said provision is not to be read in composite and cumulative manner, inasmuch as each clause in the said provision is independent because of the language employed therein.

  (ii)  The manufacturing process does not necessarily mean that it has to be of excisable goods but it would include any process which is incidental or ancillary to the completion of a manufactured product.

(iii)  The definition under section 65(76b) of the 1994 Act, read with definition under section 2(f) of the 1944 Act does not exclude the concept of ‘manufacturing process’ as defined under section 2(14) of the 1915 Act, which is an inclusive definition that includes every process whether natural or artificial.

(iv)  The dissection of the aforesaid tender conditions especially the invoices and pricing by the Division Bench for the purpose of determining the manufacturing process is incorrect in view of various decisions of the Supreme Court rendered in Arun Electrics v. Commissioner of Sales Tax [1966] 17 STC 576, Bharat Sanchar Nigam Ltd. v. Union of India [2006] 3 STT 245 (SC) and Imagic Creative (P.) Ltd. v. Commissioner of Commercial Taxes [2008] 12 STT 392 (SC).

  (v)  The view expressed by the earlier Division Bench in Som Distilleries & Breweries (P.) Ltd.’s case (supra) on the basis of scrutiny or anatomy of the various provisions of the 1915 Act, that bottling is a part of the manufacturing process, could not have been distinguished on the ground that the decision was not with respect to the activity of packaging as enshrined under section 65(76b) of the 1994 Act and the definition under section 2(f) of the 1944 Act inasmuch as the said definition by its import excludes the manufacturing process under the 1944 Act from the net of service tax.

(vi)  The Circular F. No. 249/1/2006-CX4 issued by the Central Board of Excise and Customs, dated 27-10-2008 clarifies the position that the term ‘manufacturing process’ as far as bottling is concerned, has to be understood in the context of the decision of the Apex Court and keeping that in view, has taken it out of net of service tax and the said circular is in consonance with the decision rendered by the Apex Court in Sir Shadilal Distillery & Chemical Works’s case (supra).

(vii)  The process of manufacture as defined under section 2(14) of the 1915 Act falls within the ambit and sweep of section 2(f)(i) of the 1944 Act and, therefore, there can be no levy of service tax on manufacture in view of the clear postulate under section 65(76b). To elaborate, the fundamental concept of ‘manufacture’ as engrafted under section 2(14) of the 1915 Act cannot be regarded as alien to the definition of ‘manufacture’ under section 2(f) of the 1944 Act as had been held by the Division Bench in Vindhyachal Distilleries (P.) Ltd.’s case (supra).

(viii)  The decision that the bottling of liquor can be independent, is not correct, as the liquor cannot be sold without bottling as there is a statutory stipulation that the liquor has to be sold in bottles. To further clarify, the container becomes a part of manufacturing process, and that had been so held in Som Distilleries & Breweries (P.) Ltd.’s case (supra). [Para 31]

In view of the aforesaid, it was to be held that the decision rendered in Vindhyachal Distilleries (P.) Ltd.’s case (supra) did not state the law correctly inasmuch as it had expressed the opinion that packaging and bottling of liquor are not the part of manufacturing process and, hence, liable to service tax and the view taken in Som Distilleries & Breweries (P.) Ltd.’s case (supra) had been upheld and, therefore, packaging and bottling of liquor come within the ambit and sweep of ‘manufacture’ within the meaning of clause (f) of section 2 of the 1944 Act, in view of the definition contained in section 65(76b) of the 1994 Act especially keeping in view the exclusionary facet and further regard being had to the circular issued by the Central Board of Excise and Customs. [Para 32]

The matter was to be listed before the appropriate Division Bench for final disposal. [Para 33]

CASE REVIEW

Som Distilleries & Breweries (P.) Ltd. v. State of MP 1997 (1) JLJ 319 (para 32) approved. 

Vindhyachal Distilleries Ltd. v. State of M.P. [2006] 5 STT 254 (MP.) (para 32) disapproved.

Arun Electrics v. Commissioner of Sales Tax [1966] 17 STC 576; Bharat Sanchar Nigam Ltd. v. Union of India [2006] 3 STT 245 (SC); Imagic Creative (P.) Ltd. v. Commissioner of Commercial Taxes [2008] 12 STT 392 (SC) and Sir Shadilal Distillery & Chemical Works v. State of Uttar Pradesh [1998] 8 SCC 428 (para 31) followed.

CASES REFERRED TO

Vindhyachal Distilleries (P.) Ltd. v. State of MP [2006] 5 STT 254 (MP) (para 2), Som Distilleries & Breweries (P.) Ltd. v. State of MP 1997 (1) JLJ 319 (para 2), Tamil Nadu Kalyana Mandapam Association v. Union of India [2006] 4 STT 308 (SC) (para 10), Collector of Central Excise v. S.D. Fine Chemical 1995 (77) ELT 49 (SC) (para 15), Purshottam H. Judye v. B. Potdar AIR 1966 SC 856 (para 16), Pioneer Rubber Plantation Nilambur v. State of Kerala AIR 1993 SC 192 (para 16), Bajya v. Smt. Gopikabai AIR 1978 SC 793 (para 19), Sir Shadilal Distillery & Chemical Works v. State of Uttar Pradesh [1998] 8 SCC 428 (para 22), Khoday Distilleries Ltd. v. State of Karnataka [1996] 10 SCC 304 (para 22), Arun Electrics v. Commissioner of Sales Tax [1966] 17 STC 576 (para 24), Bharat Sanchar Nigam Ltd. v. Union of India [2006] 3 STT 245 (SC) (para 25), Imagic Creative (P.) Ltd. v. Commissioner of Commercial Taxes [2008] 12 STT 392 (SC) (para 26), R. & B. Falcon (A) Pty. Ltd. v. CIT [2008] 169 Taxman 515 (SC) (para 28) and CCE v. Ratan Melting & Wire Industries 2008 (231) ELT 22 (SC) (para 29).

Sumit Nema and Mukesh Agrawal for the Petitioner. Shekhar Sharma and Sanjay Patel for the Respondent.

 

 

[2009] 22 STT 130 (BOM.)

HIGH COURT OF BOMBAY

Coca Cola India (P.) Ltd.

v.

Commissioner of Central Excise, Pune III

FERDINO I. REBELLO AND J.H. BHATIA, JJ.

CENTRAL EXCISE APPEAL NO. 118 OF 2007

AUGUST 26, 2009

Rule 2(l) of the Cenvat Credit Rules, 2004 - Cenvat credit -Input service - Whether services of advertising and marketing procured by an assessee-manufacturer in respect of advertisements for aerated waters are covered by definition of term ‘input services’ as defined in rule 2(l) when admittedly assessee manufactures concentrates which are exclusively used for manufacture of respective aerated waters which are advertised by assessee - Held, yes - Whether, therefore, service tax paid on expenditure incurred by assessee on advertisement, sales promotion, market research, etc., will have to be allowed as input stage credit more particularly if same forms a part of price of final product of assessee on which excise duty is paid - Held, yes [Paras 38 and 44]

Circulars and Notifications : CBEC Circulars No. 80/10/2004-ST, dated 17-9-2004, No. 56/5/2003-ST, dated 25-4-2003, Notification No. 96/61-Cus, dated 25-7-1991, Notification No. 59/88-Cus, dated 1-3-1988

FACTS

The assessee was manufacturer of non-alcoholic beverage bases also known as concentrates. These concentrates were known and sold under the different brand names. The concentrates were sold by the assessee to bottling companies, who in turn sell the aerated beverages manufactured from the concentrates to distributors and who in turn sell it to retailers for the ultimate sale to the consumers. The advertisement and sales promotion activities including market research were undertaken by the assessee in respect of respective aerated waters. The advertisement expenses incurred by the assessee formed the part of the sale price of concentrates on which duty had been paid. The assessee availed credit of service-tax paid on advertising services, sales promotion, market research and the like availed by it and utilized such credit towards payment of excise duty on the concentrate. Credit had been denied to the assessee on the ground that the advertisements did not relate to concentrates manufactured by the assessee.

On appeal to the Supreme Court :

HELD

The Supreme Court in Union of India v. Bombay Tyres International [1983] (14) ELT 1896 (SC) has held that all elements given to enrich the value of the excisable goods and contribute to its marketability, must form part of the manufacturing cost of the goods. [Para 19]

That advertisement of soft drink enhances the marketability of the concentrate is no longer res integra as it has been recognized in judgments of Pepsi Foods Ltd. v. Collector of CE 1996 (82) ELT 33 (Trib. - New Delhi) where the Supreme Court affirmed the view taken in Collector of CE v. Pepsi Foods Ltd. 1997 (91) ELT 544 and in Pepsi Foods Ltd. v. Collector of CE 2003 (158) ELT 552 (SC) where the royalty paid by the bottler to the assessee was held to be includible in assessable value. The revenue on this premise has always been collecting excise duty on full sale price charged by concentrate manufacturer from the bottler. The revenue has never disputed that advertisement of aerated water is an activity related to manufacture and sale of concentrate and that cost of advertisement is relatable to aerated water which forms part of value of concentrate in the hands of concentrate manufacturer and, hence, should be included in the sale price of concentrate charged by the concentrate manufacturer. On the other hand, since advertisement of aerated water promotes marketability of concentrate, manufacturers of concentrate are subject to excise duty, in terms of principles laid down in Bombay Tyre International’s case (supra) without excluding it from the sale price of concentrate charged by the concentrate manufacturer. [Para 21]

The definition of ‘input service’ uses the term ‘means and includes’. These expressions must be understood as now judicially recognized. Considering various judicial pronouncements, it is clear that the expression ‘means and includes’ is exhaustive. By the word ‘includes’ services which may otherwise have not come within the ambit of the definition clause are included and by the word ‘means’, these are made exhaustive. [Para 23]

The expression ‘such as’ in definition means for example or of a kind that. [Para 24]

The term ‘business’ is an integrated/continuous activity and is not confined or restricted to mere manufacture of the product. Therefore, activities in relation to business can cover all the activities that are related to the functioning of a business. The term ‘business’ therefore, cannot be given a restricted definition to say that business of a manufacturer is to manufacture final products only. In a case like the instant one, business of assessee being an integrated activity comprising of manufacture of concentrate, entering in to franchise agreement with bottlers permitting use of brand name by bottlers, promotion of brand name, etc., the term will have to be seen in that context. [Para 25]

The definition of ‘input service’ employs the phrase ‘activity relating to business’. The words ‘relating to’ further widens the scope of the expression ‘activities relating to business’. [Para 26]

Similarly, the use of the word ‘activities’ in the phrase ‘activities relating to business’ further signifies the wide import of the phrase ‘activities relating to business’. The rule-making authority has not employed any qualifying words before the word ‘activities’, like main activities or essential activities, etc. Therefore, it must follow that all or any activity relating to business falls within the definition of ‘input service’ provided there is a relation between the manufacturer of concentrate and the activity. Therefore, the phrase ‘activities relating to business’ are words of wide import. [Para 27]

CBEC by Circular No. 80/10/2004-ST, dated 17-9-2004, inter alia, clarified that service tax like CENVAT is basically a value added tax which is operated through credit mechanism. [Para 31]

CBEC Circular No. 56/5/2003-S.T., dated April 25, 2003 issued in the context of export of services clarified that service tax is a consumption tax. [Para 32]

The amendment of section 3 of the Central Excise Act, 1944 with effect from 12-5-2000 will show that the manifest object of the Legislature is to levy and collect excise duty as a value added tax. The Supreme Court in All India Federation of Tax Practitioners v. Union of India [2007] 10 STT 85 has explained that excise duty and service tax are value added taxes. They are consumption taxes. [Para 33]

It is, therefore, clear that the burden of service tax must be borne by the ultimate consumer and not by any intermediary, i.e., manufacturer or service provider. In order to avoid the cascading effect, the benefit of Cenvat credit on input stage goods and services must be ordinarily allowed as long as a connection between the input stage goods and services is established. Conceptually as well as a matter of policy, any input service that forms a part of the value of the final product should be eligible for the benefit of the Cenvat Credit. [Para 34]

A consumption tax derives its name from the fact that tax burden is ultimately borne by the final consumer and business does not bear the burden of the tax, since the businessmen are allowed to take credit of tax paid on inputs supplied/received by them. If, therefore, Cenvat is denied to the input service received by the assessee, as in the present case, they will become burden to the assessee, which is against the very grain or principle of VAT being a consumption tax. [Para 37]

Service tax, therefore, paid on expenditure incurred by the assessee on advertisements, sales promotion, market research, etc., will have to be allowed as input stage credit more particularly if the same forms a part of the price of final product of the assessee on which excise duty is paid. In other words, credit of input service must be allowed on expenditure incurred by the assessee which forms a part of the assessable value of the final product. If the above is not done, as sought to be done by the department in the instant case, it will defeat the very basis and genesis of CENVAT, i.e., value added tax. [Para 38]

The definition of ‘input service’ can be effectively divided into the following five categories, insofar as a manufacturer is concerned,

   (i)  Any service used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products,

  (ii)  Any service used by the manufacturer whether directly or indirectly, in or in relation to clearance of final products from the place of removal,

(iii)  Services used in relation to setting up, modernization, renovation or repairs of a factory, or an office relating to such factory,

(iv)  Services used in relation to advertisement or sales promotion, market research, storage up to the place of removal, or procurement of inputs,

  (v)  Services used in relation to activities relating to business and outward transportation up to the place of removal.

Each limb of the definition of ‘input service’ can be considered as an independent benefit or concession or exemption. If an assessee can satisfy any one of the limbs of the above benefit, exemption or concession, then credit of the input service would be available. This would be so even if the assessee does not satisfy other limb/limbs of the above definition. To illustrate, input services used in relation to setting up, modernization, renovation or repairs of a factory will be allowed as credit, even if they are assumed as not an activity relating to business as long as they are associated directly or indirectly in relation to manufacture of final products and transportation of final products up to the place of removal. [Para 39]

Explanatory note by Harmonised System of Nomenclature (HSN) to Heading 21.06 proves the integral link between concentrate manufactured by the assessee and the beverage (aerated water) manufactured by the bottler from it. The concentrate manufactured by the assessee in question had been classified and assessed to Cenvat (excise duty) under heading 21.06 by the Schedule to the Central Excise Tariff Act, 1985. That heading is identical to heading 21.06 of organised system of nomenclature issued by WCO. In fact the Excise Tariff is based on HSN. Therefore, the Supreme Court has repeatedly emphasized that the Explanatory Notes of HSN are valuable material for understanding the scope of various headings in the Central Excise Tariff. The Explanatory Note of HSN of Heading 21.06 demonstrates that the concentrates contain the flavouring ingredient that are characteristics of a particular beverage. The beverage in question is obtained simply by diluting the preparation with water, sugar and carbondioxide gas. From the Explanatory Note it is, therefore, clear that there is a link between the concentrate and the beverage made from that. The above Explanatory Note also explains the rational for business being arranged in this industry in a particular manner. This method of doing business avoids unnecessary transport of large quantity of water. In addition, the bottles and crates have to be collected back from the shop keepers or dealers and taken back to the factory for filling the fresh batch on a constant basis. At all times, the quality of beverage was maintained and marketing support to the beverages was provided by the brand name holder-cum-concentrate manufacturer. [Para 42]

It follows from the above discussion that the credit is availed on the tax paid on the input service, which is advertisement and not on the contents of the advertisement. Thus, it is not necessary that the contents of the advertisement must be that of the final product manufactured by the person advertising, as long as the manufacturer can demonstrate that the advertisement services availed have an effect or impact on the manufacture of the final product and establish the relationship between the input service and the manufacture of the final product. The manufacturer thereby can avail the credit of the service tax paid by him. Once the cost incurred by the service has to be added to the cost, and is so assessed, it is a recognition by the revenue of the advertisement services having a connection with the manufacture of the final product. This test will also apply in the case of sales promotion. [Para 43]

Therefore, services of advertising and marketing procured by the assessee in respect of advertisements for aerated waters are covered by the definition of the words ‘input services’ as defined in rule 2(l) when admittedly the assessee manufactured concentrates which were exclusively used for the manufacture of the respective aerated waters which were advertised by the assessee. The advertisement or sales promotion of aerated waters undertaken by manufacturer of concentrate was covered by the inclusive part of the definition of ‘input service’ contained in rule 2(l). [Para 43]

In the light of the above, the impugned order of the Commissioner, and the order of the Tribunal were set aside, and the matter was restored to the Commissioner, to pass appropriate order in the light of what had been set out above. [Para 44]

CASES REFERRED TO

All India Federation of Tax Practitioners v. Union of India [2007] 10 STT 85 (SC) (para 2), Union of India v. Bombay Tyres International 1983 (14) ELT 1896 (SC) (para 19), Pepsi Foods Ltd. v.Collector of Central Excise 1996 (82) ELT 33 (Trib - New Delhi) (para 21), Collector of Central Excise v. Pepsi Foods Ltd. 1997 (91) ELT 544 (SC) (para 21), Pepsi Foods Ltd. v. Collector of CE2003 (158) ELT 552 (SC) (para 21), Regional Director v. High Land Coffee Works 1991 (3) SCC 617 (SC) (para 23), CIT v. T.T.K. Health Care Ltd. [2007] 11 SCC 796 (para 23), Mahalakshmi Oil Mills v. State of Andhra Pradesh AIR 1989 SC 335 (para 23), Bharat Co-operative Bank (Mumbai) Ltd. v. Co-op. Bank Employees Union AIR 2007 SC 2320 (para 23), Good Year India Ltd.v. Collector of Customs 1997 (95) ELT 450 (SC) (para 24), State of Karnataka v. Shreyas Paper (P.) Ltd. AIR 2006 SC 865 (para 25), Shreyas Papers (P.) Ltd. v. State of Karnataka 2001 (121) STC 94 (Kar.) (para 25), Mazagaon Dock Ltd. v. CIT & EPT AIR 1958 SC 861 (para 25), Doypack Systems (P.) Ltd. v. Union of India 1988 (36) ELT 201 (SC) (para 26), CIT v. Chandulal Keshavlal & Co. [1960] 38 ITR 601 (SC) (para 28), Eastern Investments Ltd. v. CIT [1951] 20 ITR 1 (SC) (para 28), CIT v. Royal Calcutta Turf Club [1961] 41 ITR 414 (SC) (para 28), Addl. CITv. Symonds Distributors (P.) Ltd. [1977] 108 ITR 947 (All.) (para 29), Customs & Excise Commissioners v. Redrow Group Plc. 1999 Simon Tax Cases 161 (para 30), Kerala State Co-operative Mktg. Federation Ltd. v. CIT [1998] 231 ITR 814/98 Taxman 313 (SC) (para 39), Share Medical Care v. Union of India 2007 (209) ELT 321 (SC) (para 40), HCL Ltd. v. Collector of Customs1998 (77) ECR 126 (T) (para 41) and HCL Ltd. v. Collector of Customs 2001 (130) ELT 405 (SC) (para 41).

Vikram Nankani and Madhur R. Baya for the Appellant. A.S. Rao and Rajinder Kumar for the Respondent. V. Sridharan, Prakash Shah, J.H. Motwani, Bharat Raichandani and Jas Sanghvifor the Legal Intervener.