In a recent landmark judgement in Coca Cola India Pvt. Ltd. vs. Commissioner of Central Excise (2009-VIL-06-HC-BOM-ST), the Mumbai High Court has interpreted the relevant provisions of service tax law in a broad and inclusive manner in order to hold that expenses incurred by a company in relation to advertising and promoting a brand owned by it would be eligible for input tax credits as such services will qualify as ‘input services’. The decision has extended the present understanding of the service tax provisions to a significant extent and beneficially at that. 

In the above case, the appellants had come to the High Court on appeal against the order of the Tribunal on the matter of whether they, as manufacturers of intermediate products (in this instance concentrates for beverages) were entitled to avail input credits of the service tax paid on advertising and sales promotion expenses relating to the finished products manufactured by certain other companies (in this case carbonated beverages) in the manufacture of which the aforesaid inter-mediate products were, in turn, used. The additional important point was that the advertising and sales promotion expenses related to bra-nds which were owned by the appellants and which brands were affixed to the above finished products so manufactured.

The issue entirely revolved around the correct interpretation of Rule 2 of the CENVAT rules relating to the definition of ‘input services’ and in particular to the inclusive part of the definition. For ease of reference, the relevant part of this Rule is extracted below:

Rule 2(1) “input service” means any service,


(ii)………….. and includes services used in relation to setting up, modernisation, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises, advertisement or sales promotion, market research, storage upto the place of removal, procurement of inputs, activities relating to business, such as accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry and security, inward transportation of inputs or capital goods and outward transportation upto the place or removal.”

The court took note of the expressions ‘means’ and ‘includes’, ‘activities relating to business’ and ‘such as’. It considered several relevant Supreme Court decisions which had held that the word ‘means’ was used to denote that what followed thereafter was intended to speak exhaustively and no meaning other than that which was put in the definition could be assigned thereto. On the other hand, when the word ‘includes’ was used in the definition, the legislature did not intend to restrict the definition.

In other words, it intended to make the definition of wide amplitude. Similarly, the Court held, again on the basis of case law, dictionary meanings etc. that the expression ‘activities relating to business’ was one of expansion and not contraction. Particularly, the words ‘relating to’ were very significant.

Accordingly, the Court held that ‘activities in relation to business’ would cover all conceivable activities that were directly or indirectly related to the functioning of the business, since the word ‘business’ itself related to an integrated and continued set of activities and was not confined and restricted to mere manufacturing. As a result, the High Court arrived at a clear finding that the definition of ‘input services’ would have wide amplitude.

Consequently, the court upheld the argument of the appellants that while they admittedly only manufactured the intermediate products, the advertising and sales promotion expenses pertaining to brands owned by them were directly linked to and hence had an immediate nexus with the intermediate products since such intermediate products were entirely used in the manufacture of the branded finished products. Hence the advertising and promotion activities were directly beneficial for the said intermediate products as well. Consequently, the fact that the appellants themselves did not manufacture the branded finished products and in fact allowed third parties to manufacture such goods did not detract from the eligibility to credits. The Court took note of a significant decision of the

House of Lords in the context of VAT which had, on similar facts, taken a view that input VAT deduction was admissible to a construction company engaged in the sale of new buildings to prospective customers on fees charged by estate agents who were engaged by the company to assist such prospective customers in valuing and selling their existing houses in order for them to be able to purchase the new houses built by the construction company. Yet again, the Court took note of OECD guidelines which had held that the VAT was a consumption tax and equated this with the finding of the Supreme Court decision in All India Federa-tion of Tax Practitioners vs. Union of India (2007) 7 SCC 527) which had inter alia held that service taxes were value added taxes and were hence destination based consumption taxes.

Independent of the above, the court took note of the important factual position that the appellants did not claim a deduction towards such advertising and sales promotion expenses in arriving at the value of the intermediate products manufactured for the purpose of the payment of excise duty.

On a consideration of all of these underlying materials, the High Court came to the conclusion that the service tax paid on advertising and sales promotion expenses relating to brands owned by the manufacturer were admissible for input credits and the fact that the appellants did not themselves manufacture the branded finished products and were limited to manufacturing only intermediate products was not germane.

In conclusion, it must be noted that the aforesaid decision of the Mumbai High Court is an exhaustive and well considered one and has travelled far and wide in arriving at its conclusions. The decision is very beneficial as it has categorically held that the definition of ‘input services’ admits of a broad and liberal interpretation and expenses directly and indirectly linked to the ongoing business activities of an assessee would qualify for input credits. This is how it should be since the entire purpose of a value added tax, and the service tax, is undoubtedly one, is to ensure that all input taxes are available as an offset in paying output taxes so that the resultant effective tax is purely on value addition and there is consequently no cascading of taxes.

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