BUSINESS AUXILIARY SERVICES- LIQUOR MANUFACTURING

[Dr. Sanjiv Agarwal]

Statutory Provisions

Finance Act, 2009 has amended the definition of business auxiliary service. The amended definition shall be as under-

"business auxiliary service" means any service in relation to-

(i) ……..

(ii) ……..

(iii) ……..

(iv) ……..

(v) production or processing of goods for, or on behalf of, the client and includes services as a commission agent, but does not included any activity that amount to manufacture of excusable goods.

The aforesaid amendment shall be effective from September 1, 2009 and the amendment provides that only those processes, which result in the manufacture of 'excisable goods' shall be excluded from the purview of production or processing of goods' under business auxiliary services. Thus, the exemption for an activity or job work being a manufacture shall be available only if such manufacturing is of excisable goods. The amendment has been made, primarily to bring contract manufacturing processes under the service tax net. If alcoholic beverages (liquor) is manufactured on job work basis, the exemption will not be available w.e.f. 1.9.2009.The position of exclusion of 'manufacture' from business auxiliary service shall be as under-

Up to 31.8.2009             Manufacture of all good

w.e.f. 1.9.2009              Manufacture of excisable goods

Ministry of Finance has clarified vide Letter DOF No 334/13/2009-TRU clarifying the Finance Bill, 2009 proposals that the exclusion from business auxiliary services shall apply only if the activity results in manufacture of excisable goods, If the activity is a manufacture but the output or the resultant product is not an excisable good, such as alcoholic beverages, service tax shall be leviable. It has been further clarified that if certain other goods also fall within service tax net because of this amend men, the same would be exempt by way of a exemption notification.

It thus appears that this amendment has been made to levy service tax on manufacture of  alcoholic beverages.

Excisable goods shall have the same meaning as defined in section 2(d) of Central Excise Act, 1994.

Excisable Goods

Section 2(d) of Central Excise Act, 1994 defines excisable goods as under-

'Excisable goods' means goods specified in the first schedule and the second scheduled to the Central Excise Tariff Act, 1985 (5 of 1985) as being subject to a duty of excise and includes salt.

Excise duty is payable by the manufacture or producer of the excisable goods. In Excise law, for the purpose of levy of excise duty, articles or goods must be movable and must be marketable. Goods must be excisable. If an item is specified or included in Central Excise Tariff, it will be called excisable goods even if it attracts zero or nil rate of duty or is exempt from excise duty.

Liquor manufacturing

In Maa Sharda Wine Traders v Union of India [2009 -TMI - 34140 - MADHYA PRADESH HIGH COURT], it was held that "CBEC Circular dated 27.10.2008 on levy of service tax on production of alcoholic beverages on job work basis is in consonance with the statutory provisions and law as laid down by the Supreme Court. Keeping in view the dictionary clauses and circulars issues by the CBEC, it is quite luminescent that 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.

In Sir Shadilal Distillery and Chemical Works & Another v State of Uttar Pradesh, (1998) 8 SCC 428, Apex Court after referring to the decision rendered in Khoday Distilleries Ltd v State of Karnataka (1956) 10 SCC 304 had expressed the view that bottling of liquor is an integral part of manufacture and supply thereof.

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

The Circular F. No. 249/1/2006-CX dated 27.10.2008  issued by the Central Board of Excise and Customs 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 Shadialal Distillery & Chemical Works, Mansurpur (1998) 8 SCC 428.

The analysis that the bottling of liquor can be independent is not correct, as the liquor cannot be sold with out bottling as there is statutory stipulation that the liquor has to be sold in bottles. To further clarify, the container, becomes a part of manufacturing process, and that has been so held in Som Distilleries and Breweries Pvt. Ltd. v State of MP (1997) 1 JLJ 19 .

The decision rendered in M/s Vindhyachal Distilleries Pvt Ltd v State of MP 2006 -TMI - 77532 - (HIGH COURT OF MADHYA PRADESH) does not state the law correctly inasmuch as it has expressed the opinion that packaging and bottling of liquor are not the part of manufacturing process and hence liable to service tax".

CBEC Clarification

On 27.10.2008, the Ministry of Finance issued a detailed Circular with specifies reference to alcoholic products. Accordingly,

(a) '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.

(b) 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.

(c) 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.

(d) 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 Circular, thus, held that contract manufacturing arrangements did not attract service tax on the ground that the exclusion vis-à-vis manufacture would apply. Consequently, the Circular was understood to clarify the non applicability of service tax on contract manufacturing arrangements

Recent Amendment

Finance Act, 2009 has amended section 65(19) of Finance Act, 1994 to amend the scope of 'manufacture' under the exclusion clause as under—

(a) for the portion beginning with the words, 'but does not include and ending with the words and figures Central Excise Act, 1994', the words, 'but does not include any activity that amounts to manufacture of excisable goods' shall be substituted.

(b) in the Explanation, after clause (a), the following clauses shall be inserted, namely-

(b) Excisable goods has the meaning assigned to it in clause (d) of section 2 of the Central Excise act, 1944.

(c) manufacture has the meaning assigned to it in clause (f) of section 2 of the Central Excise Act, 1944.

TRU letter No 324/13/2009-TRU dated 6.7.2009 explain the Finance Bill, 2009 amendment clarifies as under -

"Modification in Business Auxiliary Service (BAS) [section 65(19)]:

"It may be recalled that production or processing of goods for or on behalf of a client falls within the purview of this service. However, if any such activity amounts to manufacture within the meaning of section 2(f) of the Central Excise Act, the same is excluded from its purview. This exclusion has been modified to state that it would apply only if the activity results in manufacture of 'excisable goods'. Both the words/phrases i.e. 'manufacture' and 'excisable goods' would have the same meaning as defined under the Central Excise Act. The impact of this change would be that even if a process of manufacture is undertaken for the client, but the resultant product does not fall under the category of excisable goods, such as alcoholic beverages, the service tax would be attracted. Certain other goods which would also fall under BAS on account of the proposed change would be kept outside the tax net by way of exemption notification, to be issued at the appropriate time."

As it was clarified by CBEC in its TRU Letter No 324/13/2009-TRU dated 6.7.2009 that certain goods shall be kept out of the service tax net under business auxiliary services arising out of amendment in scope of section 65(19), Central Government has issued  exemption notification No 32/2009-ST dated 1.9.2009 exempting the taxable services in relation to manufacture of the following products containing alcohol -

(a) pharmaceutical products,

(b) medicines,

(c) perfumery,

(d) cosmetics, or

(e) toilet preparations

In respect of above, which are charged to excise duty under Medicinal  and Toilet Preparations ( Excise Duties) Act, 1955, whole of service tax leviable under business auxiliary services has been exempted

Ministry of Finance (TRU) has in response to a representation of Confederation of Indian Alcoholic Beverages Companies (CIABC) clarified vide Letter No F. No. 332/3/2009-TRU dated 5.8.2009 that under the contract bottling arrangement, business auxiliary services (production or processing of goods for, or on behalf of client) is provided by the bottling unit to the brand owner and the bottling unit shall be the service provider. In any other arrangement, say, franchise, where bottling unit acts as a franchisee of the brand owner who acts as a franchisee, the brand owner shall be the service provider and tax liability will be on brand owner and not the bottling unit.

So far as valuation is concerned, the aforesaid letter clarifies that under    the contract bottling or manufacturing arrangement, the value of taxable service for the bottling unit shall be the gross amount charged by bottling unit for providing such service. The cost of goods like packing material, raw material like ethyl alcohol etc procured by bottling unit and used for such manufacture would from part of such gross amount. However , bottling unit shall be entitled to take cenvat credit of central excise duty paid on raw material, wherever applicable. It can also avail benefit of Notification No 12/2003-ST dated 20.6.2003 if any goods or material are sold by bottling unit to brand owner subject to documentary evidence and non  availment of credit. CBEC has also clarified that service tax on manufacture of alcoholic beverages shall be applicable prospectively and not from any earlier date.

Gist of Amendment

Thus, w.e.f. 1.9.2009, following shall hold good so far as levy of service tax on alcoholic beverages is concerned-

(a) Manufacture of alcoholic beverages by the brand owner on self service basis is not liable to any union levy- central excise or service tax.

(b) Manufacture of alcoholic beverages on behalf of brand owners by the bottlers or contract manufacturing  units under a contract shall be liable to service tax w.e.f. 1.9.2009 under business auxiliary services.

(c) In case of contract manufacturing arrangement (CMA), bottling unit is the service provider and brand owner on whose behalf bottling is done is the recipient of service.

(d) In case of a arrangement like franchise or right to use (brand, trade mark), brand owner is the service provider and bottling unit is the service receiver .

(e) In case of arrangement of leasing of production lines, the  bottler acts as a lessor and brand owner is the leasee who takes the facilities on lease and service tax shall be paid accordingly.

(f) In case of CMA arrangement, the value of taxable services shall be the gross amount charged by the bottler to the brand owner including goods and materials used and consumed during the course of production or bottling. If any goods are sold, it will not included in valuation of services.

(g)    Both, bottler as well as brand owner shall be eligible to enjoy the benefit of Cenvat Credit Rules as well as Notification No 12/2003-ST dated 20.6.2003.

(h)    Brand owner and bottlers are free to have any arrangement, viz,  contract manufacture, franchise, intellectual property right service,  leasing or buy and sale depending upon various state legislations, trade restrictions and commercial considerations.

(i) Levy of service tax on outsourced manufacture of alcoholic beverages is applicable w.e.f. 1.9.2009 and not retrospectively.

(j)  CBEC Circular dated 27.10.2008 has not been withdrawn or amended and as such, it shall continue to be in force to the extent it is applicable after the amended definition of business auxiliary service u/s 65(19) of Finance Act, 1994.

(k)  Since the definition u/s 65(19) has been amended w.e.f. 1.9.2009, all pending disputes and litigation based on revenue's understanding that such manufacturing activities were taxable prior to 1.9.2009 shall be rendered infructuous  and their fate may be decided considering that such services were not taxable prior to 1.9.2009.

In view of the aforementioned provisions and clarifications, service tax shall be payable on the value of taxable services, i.e. consideration (job charges) received or retained by the CBU for undertaking the manufacturing activities on behalf of the brand owner on job work basis.