No Service Tax on Alcohol Manufactured by Job Workers for Brand Owners – Stakeholders Win in Board though Lost Prima Facie in Tribunal.
A little flashback:
1.Our article Beer manufacture and service tax - intaxicating ?
2. wherein the High Court held that bottling of liquor is liable to Service Tax.
3. 05 10 2006 wherein we covered the Board's draft circular.
4. - Production of goods containing alcohol and discharging State Excise duty – Prima facie attracts Service Tax under the head “Business Auxiliary Services” – Tribunal orders pre-deposit of a quarter Crore
5. - Branded Medicaments containing alcohol and duty of excise paid thereon under the Medicinal & Toilet Preparations Act, 1955 – Prima facie applicants are producing goods for the client and are covered under BAS – Tribunal orders pre-deposit of Rs.50 lakhs .
6. TIOL- DDT 915 4.07.2008 - Ignited ideas yet to be extinguished – Intaxication at its worst - Service Tax on Liquor manufacturers – Draft Circular kept in cold storage?
It was in October 2006 that Board had issued a draft circular on taxability of production of alcohol on behalf of the brand owners under Business Auxiliary Service. The draft circular which was issued two years ago remained as draft only. It was even removed from the CBEC website, as maybe they thought everybody had forgotten it. In DDT 915 , it was pointed out that “Nearly 20 months have passed since the draft circular was issued and the second birthday is fast approaching and the draft circular remained as draft so long. What happened to the responses? Has the Board forgotten the Circular? Or is the response from the Liquor lobby so strong that the file has been kept in the cold storage?”
The draft circular was finally removed from the cold storage and a final circular has been issued. The Board, in the final circular (Actually, it is only a letter but not a circular) has taken a diagonally opposite view and clarified that “ manufacture” of alcohol on behalf of Brand Owners is covered under Section 2(f) of the Central Excise Act and hence stands excluded from “Business Auxiliary Service”
The logic behind the above view has been explained as:
‘Manufacture' and ‘excisable goods' are two independent concepts and it is not necessary that a process amounting to manufacture within the meaning of section 2(f) should always result in emergence of an excisable goods and vice versa . (What does this vice versa imply? Can any excisable goods emerge without involving the process of manufacture under Central Excise Law?)
The case of production of alcoholic beverages, which qualifies to be a process amounting to manufacture within the meaning of section 2(f), when read with the relevant judicial pronouncements, because a new product, with a distinct name, character or use; and capable of being marketable, emerges.
The exclusion provision under the definition of Business Auxiliary Service (under the Finance Act, 1994) makes a reference to a definition of the word ‘manufacture' figuring under another Act (i.e. The Central Excise Act, 1944). It is a settled law that when a definition from an Act is transposed into another Act, it is as if the said definition is physically written into the borrowing Act without any reference to the context of such definition in the Act from which it is being borrowed. Thus just because Central Excise Act does not extend to the manufacture or production of alcoholic beverages meant for human consumption, it cannot be said that the term ‘manufacture' used in Business Auxiliary Service would also not cover the process of making the said product, namely alcoholic beverages.
The confirmed demands have already reached Tribunal and in two cases, the CESTAT ordered pre-deposit having found a prima facie case in favour of the revenue 2008-TIOL-1295-CESTAT-MUM and 2008-TIOL-1161-CESTAT-MUM. Now the advocates can simply place the Board's letter before the CESTAT and laugh their way to the Banks.
It has also been clarified that if the bottling units undertake only packing or labeling alone, such activity would fall within “its ambit” and would be charged to service tax.
It is to be seen that the above activity of packing or labelling was held to be a taxable service under “Packaging Service” under Section 65(76)(b) of the Finance Act 1994 by the MP High Court in which was also referred to in the Draft Circular. But now, as per the Board's letter, the same is taxable under Business Auxiliary Service. Well, what is the difference? Except for the fact that under BAS the revenue can get tax for the period prior to 16.5.2005, the date from which packaging service became taxable.
It has also been clarified that if the distillery is taken on lease, (may be by the brand owner) the same is taxable under renting of immovable property service and if the Brand owner collects only fee for grant of permission to use the Brand with the property, risk and reward of the product rest with the manufacturer, in such cases, the amount received by the Brand Owner is taxable under “Intellectual Property service”.
Normally wherever Brand Owner allows licensee to use brand name, they also ensure that the products manufactured by the licensee are as per the quality standards of BO- to protect the quality and brand image. To ensure this, the brand owner enters into a License Production Agreements –– and collects amounts for granting representational right to manufacture Brand Owner goods. Such License Production Agreements would fall under the category of Franchisee Service, about which the Board's letter is silent. It is only mentioning about IPR service, not franchisee service.
Para 3.3 of the Board letter introduces a concept called ‘complete manufacture' but the definition under Section 2(f) mentions any process incidental of ancillary to the completion of a manufactured product would also cover under the definition of manufacture. Whether packing into bottles amounts to manufacture or not is again a debatable point. Packaging service (which includes labeling also as per definition) excludes from the purview of service tax if the process amounts to manufacture. It is every likely that the trade will take shelter under this clause arguing that ‘bottling' is an activity ancillary to manufacture (blending) to make the alcoholic liquors marketable.
But again this important issue was clarified in a letter addressed to the Chief Commissioners and the Commissioners. When the draft circular was placed in public domain for eliciting the response from the so called stakeholders, is it not necessary that the information should also be provided to the stakeholders? Instead of a letter, why a public circular was not issued?
The State shall endeavour to bring about prohibition of the consumption except for medicinal purposes of intoxicating drinks and of drugs which are injurious to health – Article 47 of the Constitution.
CBEC Letter F.No . 249/1/2006- CX 4 dated 27th October 2008