OFFICE OF THE COMMISSIONER OF CENTRAL EXCISE:: MADURAI

Trade Notice No. 13/2009  Dated:  13.03.2009.    Service Tax  No.    5 /2009

Sub: Service Tax – Levy of service tax on production of Alcoholic beverages on job work basis – Reg.

01.        BRIEF BACKGROUND

Issues relating to taxable services provided during the course of production of alcoholic beverages (such as Indian Made Foreign Liquors, Branded Country liquors and similar products) are matters of dispute for a considerable period.  In this regard, a draft circular of Central Board of Excise & Customs in F.No.249/1/2006-CX.9 dated November, 2006 (on applicability of service tax on taxable services provided in certain cases during the course of production of alcoholic beverages) was placed on the official website for eliciting responses from the stakeholders.  The responses received from various stakeholders were carefully examined.  It was noticed that in certain cases such alcoholic beverages are produced by the distillers who also own the brand names affixed on such beverages.  Such beverages are cleared on payment of State Excise Duty and there are no known disputes as regards the liability to pay service tax.  In other cases, the owners of the brand name and the manufacturers may be two different entities and issues have been raised regarding provision of taxable services in such situations.  There are several types of arrangements between the brand owners and the maker of the alcoholic beverages, which are as follows:

02.        THE BRAND LICENSING ARRANGEMENT

Many alcoholic beverages bear brand names.  The Brand Owners (herein after called the BO), which includes Indian subsidiaries of International brand owners, hold the intellectual property rights over such brand names.  The Licencee (who holds the licence by the State Government to manufacture such alcoholic beverages) manufactures alcoholic beverages under authority to use such brand name granted by the BO.  The BO may also provide technical staff / assistance to maintain required quality.  The alcoholic beverages, so manufactured are directly sold (after paying State excise duty) by licencee / manufacturer. Property, risk and reward of the products so manufactured rest with the licencee / manufacturer and not with the BO, who is paid an agreed sum for grant of permission to use such brand name and the technical know how.  In such cases the BO provides taxable service, namely ‘Intellectual Property Service” to the licencee / manufacturer.  The tax is chargeable on the gross amount charged by the BO from the licencee / manufacturer.

03.        CONTRACT MANUFACTURING ARRANGEMENT

3.1        Under such arrangement the BO gets alcoholic beverages manufactured by the licencee / manufacturer, the latter holding the required State Licences for manufacture of the alcoholic beverages.  In trade, such licencees / manufacturers are called the Contract Bottling Units or CBUs.  The cost of raw materials (and in some cases, even capital goods) and other expenses are either paid by the BO or reimbursed by the BO.  Statutory levies (i.e., State Excise Duty) are also reimbursed to the CBU by the BO.  The alcoholic beverages are sold by or as per the directions of the BO and profit or loss on account of manufacturing and sale of alcoholic beverages is entirely on account of BO, who thus holds the property, risk and reward of the products.  The CBU receives consideration (i.e. job charges) for undertaking the manufacturing activity on job work basis.  There is no doubt that under such an arrangement, CBU is a service provider providing services to BO.  A doubt has arisen, whether or not the CBU provides a taxable service namely the Business Auxiliary Service (BAS) to BO.  This taxable service includes ‘any service provided or to be provided’ in relation to production or processing of goods for, or on behalf of, the client’.  This taxable service, however, by definition excludes ‘any activity that amounts to “manufacture” within the meaning of clause (f) of Section 2 of the Central Excise Act, 1944’ from its ambit.  The issue in dispute is whether such activity would be hit by the exclusion clause mentioned above.

3.2        In the draft Circular dated November, 2006, it was mentioned that as alcoholic beverages are not covered under Central Excise Law, the production of beverages would not fall within the meaning of manufacture within the meaning of clause (f) of Section 2 of the Central Excise Act.  Thus, the exclusion clause would not apply to production of non-excisable goods, resulting in its coverage under Business Auxiliary Service (BAS).  However, the matter was re-examined in detail by the Board after receipt of the responses and it has now been concluded that the exclusion would be applicable in the instant case for the following reasons:

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(a)        Plain reading of Section 3 of the Central Excise Act, 1944 shows that for levy        and collection of Central Excise Duty, the following conditions must be satisfied,

v                  The process undertaken must amount to manufacture as defined under Section 2(f); and

v                  The result of such process should be emergence of excisable goods, which as per Section 2(d) are the goods specified in the First and the Second Schedule of the Central Excise Tariff Act, 1985 as being subjected to duty of excise.

Therefore, ‘manufacture’ and ‘excisable goods’ are two independent concepts and that 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.  Whether a process would amount to manufacture within the meaning of Section 2(f) has to be seen independently, based on the criteria evolved through various judgements of the apex court. There may be a case, when a process may amount to manufacture under Section 2(f) but it may not result in emergence of an excisable product.  If that be so, then the exclusion clause under BAS, which refers only to the activity amounting to manufacture within the meaning of Section 2(f), would still apply to such processes, whether or not the resultant product are excisable goods.  Such is 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; and

(b) In the instant case 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.  It is the words of that definition, which is imported into the borrowing Act and not the scope of the first Act and the context in which such definition is used in the first Act.  Admittedly the scope of the two Acts would be distinct and if the definition is borrowed from the first Act into the second Act having different scope, the same would get disturbed / distorted if the context and scope of the earlier Act is also imported.  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.

3.3        In view of the foregoing, it was decided that if the CBU undertakes complete process of manufacture of alcoholic beverage under the ‘Contract Bottling Arrangement’ as described above, then such activity would not fall under the taxable service, namely the BAS. However, in case the activity undertaken by the CBU falls short of the definition of manufacture (such as activity of ‘packing’ or ‘labeling’ alone), then such activity would fall within its ambit and would be charged to service tax.

04.        LEASE ARRANGEMENT

4.1        Under such agreement the distillery of the lessor is taken on lease by the lessee (who has the license to produce alcoholic beverages and may be the brand owner) who pays rent for the same.  In such a case the rent collected by the lessor / distillery owner is chargeable to service tax under ‘renting of immovable property service’.

05.        CONCLUSION

5.1        The view expressed in draft Circular F.No.249/1/2006-CX.9 dated November, 2006 stands modified as above.  As there can be different types of arrangements between the contracting parties, nature of such arrangements should be closely examined to decide taxability of service involved.

6.         This may be brought to the notice of all constituent members of your trade associations.

(Authority: Board’s letter F.No.249/1/2006-CX.4 dated 27.10.2008)

(Issued from file C.No.IV/16/06/2009-STU)

(A.S. MEENALOCHANI)

DEPUTY COMMISSIONER

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