NO GST ON CONTRACTUAL LIQUOR BOTTLING (PART-1)

[Dr. Sanjiv Agarwal]

Manufacture or production of liquor has always been a controversial matter in indirect tax regime. While the Constitution of India does not allow Union to levy any tax (earlier central excise duty or Goods and Services Tax now) on manufacture of alcoholic beverages meant for human consumption, i.e. potable liquor, it remains a State subject. This was earlier subject to levy of State Excise Duty and Value Added Tax and now subject to same taxes, it being out of GST ambit.

Pre-GST taxation

Prior to GST coming into force w.e.f. 01.07.2017, following taxes were levied on manufacture of alcoholic beverages meant for human consumption:

1. State excise duty (on manufacture)
2. Value added tax (on transfer of goods)
3. Service Tax (based on contractual arrangements between bottlers and brand owners)

Both, prior and post 01.07.2017 (when negative list was introduced in Service Tax), manufacture was excluded from business auxiliary services and later there was a specific entry in negative list for process amounting to manufacture and production of goods.

In Carlsberg India (P.) Ltd. v. Union of India 2016 (8) TMI 250 - DELHI HIGH COURT , where assessee was manufacturing alcohol on job work basis and Department demanded service tax under Business Auxiliary Services (pre-negative list era) and where the assessee argued that manufacture of alcohol on job work basis falls in exclusive domain of State legislatures under Entry 51 of State List of Schedule VII of Constitution, it was held that Entry 51 of List II envisages manufacture of alcoholic liquor for consumption and it does not contain any provision with respect to manufacture thereof by one person or entity for another and thus the same cannot fall within the purview of Entry No. 51 of List II of Schedule-VII of Constitution.

In Maa Sharda Wine Traders v. Union of India 2008 (3) TMI 319 - 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, 1996 (1) TMI 453 - SUPREME COURT OF INDIA , Apex Court after referring to the decision rendered in Khoday Distilleries Ltd v. State of Karnataka 1995 (12) TMI 378 - SUPREME COURT OF INDIA 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 clarified 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 Shadilal Distillery and Chemical Works & Another v. State of Uttar Pradesh, 1996 (1) TMI 453 - SUPREME COURT OF INDIA.

The analysis that the bottling of liquor can be independent is not correct, as the liquor cannot be sold without 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  1996 (7) TMI 568 - MADHYA PRADESH HIGH COURT .

The decision rendered in M/s Vindhyachal Distilleries Pvt Ltd v. State of MP  2006 (4) TMI 249 - MADHYA PRADESH HIGH COURT 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”.

Normally in such an arrangement, following cost elements are found –

(i)        Bottling / job charges - paid to CBU

(ii)       Distribution costs including freight, transit insurance etc - paid to CBU

(iii)     Other reimbursable - paid to CBU

(iv)      Cot of raw materials - paid to CBU

(v)       Cost of packing materials - paid to CBU

(vi)      State excise duty and VAT - paid to State Government

(vii)    Surplus/profit - retained by BO

On 27.10.2008, the Ministry of Finance issued a Circular which specified taxability issue with reference to alcoholic products. Accordingly,

1. ‘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.

2. 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.

3.  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.

4. 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.

Such processes amounting to manufacture on production of goods were placed under negative list and no Service Tax was leviable thereon. There was no levy of service tax on any process or job work amounting to manufacture or production of goods including manufacture of alcoholic liquors for human consumption, opium, India hemp and narcotic drugs on which State excise duties are leviable. In essence, these were out of service tax net because in case of manufacture of goods, excise duties are leviable and in case of alcoholic beverage etc. these are subjects of taxation by States and not covered under Central Excise Act, 1944. Earlier, exemption was provided to services in relation to manufacture or processing of alcoholic beverages vide Notification No. 39/2009-ST dated 23.09.2009 and Notification No. 43/2009-ST dated 2.12.2009.

Vide Notification No. 39/2009-ST dated 23.09.2009, exemption from service tax has been provided on the value which represents the value of inputs i.e., raw materials and packaging materials used in the manufacture of such alcoholic beverages. Later, Circular No. 332 –TRU dated 30.10.2009 was issued by CBEC clarifying that -

1. Service tax would be payable on the bottling/job charges, distribution costs and other reimbursable.
2. So far as inputs i.e., raw materials and packing materials are concerned, one of the conditions of exemption notification No. 39/2009-S.T. is that there should be documentary proof specifically indicating the value of these inputs. Therefore, service tax on the value of raw materials and packaging materials would be exempt only when such charges are specifically mentioned in the invoice raised / documents maintained by the CBU.
3. As regards the statutory levies, namely, excise duty/VAT, they do not present any ‘consideration’ for rendering the service. Whether such amount is paid by BO or by CBU, they have no nexus with the provision of service. As such, these levies will not be included for charging service tax.
4. Similarly, the surplus/profit earned by the BO being in the nature of business profit (which falls within the purview of direct taxes), will not be chargeable to service tax.

The taxability was tested and decided in Blossom Industries Ltd. v. Commissioner, Daman 2015 (10) TMI 859 - CESTAT AHMEDABAD ,  wherein it was held that on plain reading of the Board instruction, it is clear that one of the elements of gross value of invoice is 'surplus/profit retained by BO', which would not be included in taxable value. In other words, the amount returned to BO is in so far as 'surplus/profit' of BO, cannot be included in the taxable value. The amount 'surplus/profit retained by BO' as claimed by the appellant, had been returned to BO and therefore, such amount cannot be included in the taxable value and Service Tax levied thereon. Such amount was not includible in the assessable value. As such, matter was remanded back for re-quantification of demand.

According to erstwhile section 65B(40) of the Finance Act, 1994, “process amounting to manufacture or production of goods” meant a process on which duties of excise are leviable under section 3 of the Central Excise Act, 1944 or any process amounting to manufacture of alcoholic liquors for human consumption, opium, Indian hemp and other narcotic drugs and narcotics on which duties of excise are leviable under any State Act for the time being in force.

In the above definition, processes under the medicinal and Toilet preparations (Excise Duties) Act, 1955 was included w.e.f. 10-5-2013.

Service tax was to be levied on processes, unless otherwise specified in the negative list, not amounting to manufacture or production of goods carried out by a person for another for consideration. Some of such services relating to processes not amounting to manufacture were exempt under Notification No. 25/2012-ST dated 20-6-2012 (entry No. 30).

Amendment made by Finance Act, 2017

Finance Act, 2017 had omitted the entry in clause 40 of section 65B within effect from the date of enactment. This omission is a consequent amendment as the said entry in negative list [Section 66D(6)] has been omitted and it will no longer be a part of negative list. However, the said service shall be allowed exemption under Entry No. 30(i) of amended Notification No. 25/2012-ST. The definition has now been provided in clause 2(ya) of the amended exemption Notification No. 25/2012-ST vide Notification No. 7/2017-ST dated 2.2.2017.

            “(ya) ‘process amounting to manufacture or production of goods’ means a  process on which duties of excise are leviable under section 3 of the Central Excise Act, 1944 (1 of 1944), or the Medicinal and Toilet Preparation (Excise Duties) Act, 1955 (16 of 1955) or any process amounting to manufacture of opium, Indian hemp and other narcotic drugs and narcotics on which duties of  excise are leviable under any State Act for the time being in force”.

These amendments were effective from date of enactment of Finance Act, 2017.

Further, clause(f) of section 66D (negative list) stipulated that negative list of services shall include ‘services by way of carrying out any process amounting to manufacture or production of goods excluding alcoholic liquor for human consumption”.

The words ‘production’ and ‘manufacture’ are synonyms and can be interchanged which means that - to bring in to being or form manufacture or produce thus implies change in the sense in the sense of transformation in to new and different article having a distinct name, character and use.

Tax under GST regime

Levy and collection of tax under the GST regime is governed by section 9 of CGST Act, 2017. Accordingly, there shall be levied a tax called the central goods and services tax on all intra-State supplies of goods or services or both, except on the supply of alcoholic liquor for human consumption, on the value determined under section 15 and at such rates, not exceeding twenty percent, as may be notified by the Government on the recommendations of the Council and collected in such manner as may be prescribed and shall be paid by the taxable person.

Further, clause 12A of article 366 of the Constitution of India defines ‘Goods and Services Tax’ to mean any tax on supply of goods or services or both except taxes on the supply of the alcoholic liquor for human consumption. Thus, GST on alcoholic liquor for human consumption can not be levied under the present legal framework of GST.

(To be continued…)