Service Tax on manufacture of alcoholic liquor for human consumption on job work basis with effect from 1st June 2015 is Constitutionally Valid: Delhi High Court.
Issue Under Consideration
These are three petitions filed under Article 226 of the Constitution of India challenging the constitutional validity of Section 66B of the Finance Act, 1994 („FA 1994‟) read with 65B(40) and Section 66D of the FA 1994 as amended by Clause (f) of Section 107 and Clause (2) of Section 109 of Finance Act2015 („FA 2015‟) respectively, along with Notification No. 14/2015/-ST dated 19th May 2015, which levies service tax with effect from 1st June 2015, on persons who manufacture alcoholic liquor for human consumption on job work basis. Also challenged is the constitutional validity of Section 113(A) (1) of the Finance Act, 2009 („FA, 2009‟) by which Section 65(19) of the FA 1994 stood amended.
The central thrust of the Petitioners’ argument is that Parliament lacks the legislative competence to enact the said amendments since the activity of manufacture of alcoholic liquor for consumption, whether for oneself or for another person, lies exclusively within the domain of the State Legislature under Entry 51 of List II of Schedule VII to the Constitution. The case of the Respondents on the other hand is that service tax introduced by way of Chapter V to the FA 1994 is within the legislative competence of the Parliament to levy and collect. The topic of legislation is sought to be traced to the residual Entry 97 of List I of the VII Schedule to the Constitution. The Respondents contend that service tax is not levied on the manufacture of alcohol but on the service aspect of the contract of manufacturing of alcohol on behalf of the principal manufacturer/brand owner. For the reasons to follow, this Court agrees with the Respondents and rejects the challenge raised by the Petitioners.
Held by High Court
If the ‘pith and substance’ doctrine is applied in the instant case, it is evident that while Entry 51 of List II envisages manufacture of alcoholic liquor for consumption it does not contemplate a situation of manufacture of alcoholic liquor by one person or entity for another. Importantly, the taxable event is the manufacture and it is amenable to state excise duty. However, when it comes to manufacture for another, in pith and substance it is a service performed by one for another and cannot therefore fall within the ambit of Entry 51 of List II.
Even applying the aspect doctrine it is possible to recognise the legislative competence of Parliament in seeing to bring within the service tax net the activity of job work involved in the manufacture of alcoholic liquor for human consumption.
The essential feature as far as Section 65B (44) of the FA 1994 is concerned is the rendering of a service i.e. any activity carried out by a person for another person for consideration. Therefore, a manufacturing activity undertaken by an entity for itself cannot be said to be a service provided to anyone and definitely not to itself. Therefore, that activity of manufacture by the brand owner who is also a licence holder could not be said to be amenable to service tax. However, where manufacturing of alcoholic liquor for human consumption is not manufactured by the entity holding licence/brand owner, but by another entity holding such licence and the cost of manufacture is to be reimbursed by the principal manufacturer/brand owner and that activity by one person for another would therefore be „service‟within the meaning of Section 65B (44) of the FA 1994. For these reasons, the challenge to the validity of Section 113(A) (1) of the FA, 2009 by which Section 65(19) of the FA 1994 stood amended and whereby the expression ‘business auxiliary service’ did not exclude the activity of manufacture of alcoholic liquor for human consumption, when undertaken by one entity for another, is negatived.
Under Section 107 (f) of FA 2015, Clause (40) of Section 65B of FA 1994 would no longer contain the word „alcoholic liquors for human consumption‟. Section 109 (2) of FA 2015 further substitutes clause (f) of Section 66D of FA 1994 with “services by way of carrying out any process amounting to manufacture or production of goods excluding alcoholic liquor for human consumption.”In other words this commodity was removed from the negative list.
As already noticed, by the Notification dated 19th May 2015 the appointed date on which the abovementioned provisions of FA 2015 would become effective was 1st June 2015. On that said date the manufacture of alcoholic beverage for human consumption on contract basis has to be viewed as services rendered by one party to another and therefore, amenable to service tax. It is traceable to Entry 97 of List I as it does not fall within the ambit of any of the taxing entries in List II.
According to the learned counsel for the Petitioners in the present case there was only one activity i.e. manufacture of alcoholic liquor for human consumption which was entirely covered by Entry 51 of List II with there being no other activity or even ‘an aspect’ of that activity that remained outside Entry 51 of List II and thereby attracted any other levy including a service tax.
It is not possible to agree with the above submission when a clear distinction is discernible between manufacture of such alcoholic liquor by oneself and for another. The latter partakes the character of rendition of a service which is not possible to be accommodated within the act of manufacture by oneself. The act of manufacturing for another by way of job work answers the plain definition of service under Section 66B (44) of the FA which begins with: “’service’ means any activity carried out by a person for another for consideration and includes a declared service, but shall not include…”. Therefore it is a fallacy to equate the two activities viz., manufacture of such alcoholic liquor by and for oneself and undertaking manufacture for another. The changes brought about in 2015 was intended to capture the latter aspect which is unique to job work for the purposes of levy of service tax. In his budget speech on 28th February 2015, the Finance Minister explained, inter alia, that service tax was “to be levied on service by way of carrying out any processes as job work for production or manufacture of alcoholic liquor for human consumption” It is significant that the Respondents in their written submissions have confirmed that “service tax is only being imposed on the value of the services provided by the job worker/contract manufacturer and not on the whole sale price of alcohol.”
Consequently, in the present case the Court is satisfied that what is sought to be made amenable to service tax is the activity of contract manufacturing of alcoholic liquors fit for human consumption by one entity for another. Such provision of service which is in pith and substance not covered under Entry 51 of List II of the Seventh Schedule to the Constitution of India is certainly amenable to levy of service tax by Parliament which is competent to legislate on that aspect with reference to Entry 97 of List I.
The Court, therefore negatives the challenge to the validity of Section 113(A) (1) of the FA, 2009 by which Section 65(19) of the FA 1994 stood It also negatives the challenge to the validity of Section 66B of the FA 1994 read with 65B(40) and Section 66D of the FA 1994 as amended by Clause (f) of Section 107 and Clause (2) of Section 109 of FA 2015. The validity of the notification appointing the commencement date of the above amendment as 1st June 2015 as the date on which the above provision would come into force is also, therefore, upheld.