TMI Blog2015 (6) TMI 586X X X X Extracts X X X X X X X X Extracts X X X X ..... on account of appellant who holds the property risk and reward of the product. M/s Pilkhani received consideration for undertaking the manufacture of job work done basis. In these circumstances, the appellant is not required to pay service tax at all. As per the agreement between the parties, the risk of manufacture and sale lies with the appellant in respect of the Foster Brand beer got manufactured by it from FIPL. It is evident from the contract that FIPL is only responsible for bottling, packing and dispatch as per the specification, terms, formula etc. as laid down by the appellant. Further, FIPL is bound to charge the price from the notified Indenter of the appellant as fixed by the appellant. Only for the risks associated with the manufacturing process fastened on FIPL (CBU), it cannot be said that as FIPL is responsible for proper quality, quantity and timely production, they are providing Franchise Service and/or IPR Service. Appellant are the Brand Owner of IFML and M/s. Pilkhani is a job worker manufacturing IMFL on behalf of the appellant and the amount retained by the appellant is the business profit not liable to be taxed under the Finance Act, 1994 under the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... They got manufactured IMFL through M/s. Pilkhani and the same was delivered / sold by them and earned profit as per difference in market rate /price and cost price as per the agreement with M/s. Pilkhani. Therefore, they are not liable to pay service tax as M/s. Pilkhani is their job worker. It is further submitted that the issue of taxability of the service was clarified by the CBEC Circular No. 249/I/2006-CX.4 dated 27.10.2008 wherein it has been clarified that the agreement and activity undertaken by the appellant and M/s. Pilkhani, no service tax is payable by the appellant. Therefore, they are not liable to pay the service tax. He further, submits that the issue was again examined by the CBEC and it further clarified by Ministry of Finance letter vide F.No. 332/17/2009-TRU dated 30.10.2009 clarifying that the profit earned by the brand owner being in the nature of business profit, no service tax is payable. Therefore, appellants are not liable to pay the service tax. He also relied on the decision of this Tribunal in the case of Diageo India Pvt. Ltd. vs. CCE, Thane II [2013-TIOL-790-CESTAT-MUM] and Skoll Brewaries Ltd. Sab Miller India Ltd. vs. CCE ST, Aurangabad [2014-TIOL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tually agreed upon. Provided, however that notice of intention to renew this agreement shall be received by the other party 3 months prior to the expiration of this Agreement. 3. Pilkhani will be free to bottle its own brands including CSD Rum and as long as the requirement of BDA is complied in full under this agreement Pilkhani can also enter into other separate arrangement with any other party/ parties but with separate blending and bottling facilities. 5. BDA will provide a sample of spirit normally used by BDA in the manufacture of its products conforming to the specifications as appearing in Annexure 1 and shall manufacture / procure and distill spirit which shall conform to such sample within tolerances as given by BDA. 6. Quality Observer: (a) BDA will have absolute right to post its representatives at the Distillery for the following purposes.viz: i) To check the quality of spirit used in manufacturing of BDA s brands by Pilkhani so that the same is in line with the requirement of BDA. ii) To test and record the quality of such spirit, batch or batches quality of which is acceptable to BDA. iii) To check and approve the quality of finished product prio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ck transfer in compliance with state excise formalities. 12. All excise formalities required for the distillery shall be the responsibility of Pilkhani, BDA will obtain or cause to be obtained at its cost such excise permits /asses as may be necessary for the purpose of dispatches of IMFL products manufactured by Pilkhani under this agreement. 13. (a) Pilkhani shall obtain at its cost all raw materials required for the manufacture, distillation, blending and bottling of IMFL products, except such materials as agreed to be provided by BDA. (b) BDA assures a minimum lifting of 3 lakh cases of IMFL per annum for which Pilkhani has assured BDA that their existing capacity is adequate to produce and supply such quantities. (c) In case of any short fall in the lifting of the minimum quantity as mentioned in para 13(b) above BDA will pay to Pilkhani 50% of the bottling charges on such short fall. 14. IMFL manufactured by Pilkhani shall be bottled, sealed, labeled, packed etc. in the packing materials such as bottles, seals, capsules, labels, mono-cartons, corrugated boxes. etc. as may be specified by and procured from sources identified by BDA, since BDA has permitted Pilkh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t referable to the packaging material will be reviewed and revised from time to time on actual basis and the change in respect thereof shall also be incorporated as part of this agreement by separate writings as aforesaid from time to time and this agreement shall stand altered and/or amended or modified from the date of such writing relating to the cost of packaging materials only. However, the price, otherwise agreed to will remain firm for the period of six months from the date hereof. 22. Royalty is payable by Pilkhani to BDA for the permitted use of the said trade marks or brand names at the rate and in the manner as provided in clause 25(a), such royalty may vary from time to time depending on market conditions. 25. (a) BDA will be responsible for obtaining orders, excise permits /passes etc. from parties to whom the IMFL products are to be sold directly be Pilkhani (referred to as Direct indentors). The indent for the purchase of IMFL products shall be placed on Pilkhani by such Direct indentors. Pilkhani, on the instructions of BDA will, after completing the excise and other formalities, dispatch the IMFL products to the Direct indentors and will bill the Direct In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nner as specified in the Manufacturing Agreement. From the tenor of the agreements, we find that the appellant is a brand owner of the IMFL and was having own arrangement with M/s.Pilkhani for manufacture of IMFL at their distillery as per the specification to be provided and will be undertaking the sale of the IMFL so manufactured. As the appellants were not having any manufacturing license, the appellant have allowed M/s. Pilkhani to manufacture as license holder and who can sell the same, therefore the arrangement between the parties is like that M/s. Pilkhani shall manufacture the IMFL and sell the manufactured IMFL as per the direction of the appellant on the price fixed by the appellant. Therefore, sale proceeds of the goods shall be relevant to the said account and then out of the said amount M/s. Pilkhani shall retain the cost of manufacture of the products and statutory dues such as sales tax, excise duty etc. and the balance amount shall be remitted to them. Apart form the tax and price payable to the Government were to be paid by the manufacturer to the Government directly and balance amount shall be given to the appellant who shall not withdraw any amount till relea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ues 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 F.No. 249/1/2006-CX.9, dated November, 2006 [2006 (4) S.T.R. C7] (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, whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 : (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; The process undertaken must amount to manufacture as defined under Section 2(f); and The result of such process should be emer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sumption, 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 labelling alone) then such activity would fall within its ambit and would be charged to service tax. 8. On going through the above circular, we find that the arrangement between the appellant and M/s. Pilkhani is squarely covered under clause 3 of said Circular wherein the appellant gets IMFL manufactured by M/s. Pilkhani who is holding the State license of manufacture of alcoholic beverages. In particular M/s. Pilkhani is owner as contract bottling i.e. CBU. As per the agreement, cost of raw material and other expenses were either paid by the appellant or reimbursed by the appellant. The State levies such as excise l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. (c) 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. (d) 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. 10. On going through the said TRU Circular, we find that the arrangement is executed by the parties is as per para 2 of the said circular and in that circular it has been clarified that the surplus and profit earned by the manufacturing company or brand owner is not chargeable to service tax. 11. This issue again came up before this Tribunal in the case of Diago India Pvt. Ltd. (supra) wherein this Tribunal after examining the agreement has obser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Beverages 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 licensee/manufacturer. The tax is chargeable on the gross amount charged by the BO from the licencee/manufacturer. 6.2 The Circular further in para 3.1 recognizes Contract Manufacturing Arrangement where the BO gets alcoholic beverages manufactured by the licensee/manufacturer, the latter holding the required State Licenses for manufacture of the alcoholic bev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted 23-9-2009, it was clarified that the Government exempts the taxable service specified in sub-clause (zzb) of Section 65(105), provided by a person (service provider) to any other person (service receiver) during the course of manufacture or processing of alcoholic beverages by the service provider, for or on behalf of the service receiver, from so much of value which is equivalent to the value of inputs, excluding capital goods, used for providing the said service, subject to the condition that no Cenvat credit has been taken under the provisions of Cenvat Credit Rules, 2004; there is documentary proof specifically indicating the value of such inputs, and where the service provider also manufactures or processes alcoholic beverages, on his or her own account or in a manner or under an arrangement other than as mentioned aforesaid, he or she shall maintain separate accounts of receipt, production, inventory, dispatches of goods as well as financial transactions relating thereto. 6.5 Further, the Circular dated 30-10-2009 clarified that :- (a) Service tax would be payable on the bottling/job charges, distribution costs and other reimbursible. (b) So far as inputs i.e. ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of the mark. The manufacturer is not given the right to sell the goods on his own. In such an agreement the owner of the trade mark is the actual user of the mark in a trade mark sense and obviously the benefit of such user goes to him. The name of the manufacturer may or may not appear on the labels. It would be advisable not to mention the name of the manufacturer on the goods or on the labels or in any trade literature. This may not be possible in the case of certain goods like drugs and cosmetics where the relevant statute imposes a condition that the name of the manufacturer should appear on the labels. In such cases to safeguard the ownership of the trade mark it should be clearly indicated on the labels and other material where the trade mark appears as to who is the owner of the trade mark and that the goods are manufactured solely for the owner of the mark. It is further advisable that the agreement for the manufacture should be entered into only after making an application for registration of the mark. 6.8 Thus, the appellant vehemently argues that that neither the provisions of Franchise Service are attracted nor the provisions of Intellectual Property Right are att ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sible for proper quality, quantity and timely production, they are providing Franchise Service and/or IPR Service. Further, taking notice of the definitions which are reproduced below :- 47. franchise means an agreement by which the franchisee is granted representational right to sell or manufacture goods or to provide service or undertake any process identified with franchisor, whether or not a trade mark, service mark, trade name or logo or any such symbol, as the case may be, is involved] 48. franchisor any person who enters in to franchise with a franchisee and includes any associates of franchisor or a person designated by franchisor to enter into franchise on his behalf and the term franchisee shall be construed accordingly. From the aforementioned definitions, it is crystal clear that in the facts and circumstances, no services have been provided by the appellant to FIPL under the classification of Franchise Service and IPR Service . 13. We are also in agreement with the case law relied upon by the appellant. 14. We also find that as per the clarifications issued by CBEC circulars discussed hereinabove, we are of the considered opinion that the appellant are ..... X X X X Extracts X X X X X X X X Extracts X X X X
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