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TMI Blog2022 (8) TMI 927X X X X Extracts X X X X X X X X Extracts X X X X ..... so engaged in similar business, was amalgamated with M/s USL with effect from 01.04.2005, by a court sanctioned scheme, with effect from 17.10.2006. M/s USL was getting some of its products manufactured in distilleries and bottling units owned by outsiders; these distilleries/bottling units are known, either as contract bottling units (CBU) or Tie-up manufacturing units (TMU); in accordance with the regulatory requirements, these CBUs/TMUs, in addition to the production, also undertook the responsibility of selling the IMFL on behalf of the appellant; the TMUs undertook the production under the supervision of the people deputed by the appellant; wherever the CBUs and TMUs undertook the responsibility of selling the products, the sale proceeds of the IMFL received by the CBUs / Tie up units were remitted back to the appellant, after deducting from such amounts the cost of the production, cost of raw materials, packing materials, freight, licence fee, etc; the amount payable to the CBUs/TMUs towards use of their manufacturing facility is known as retention money or bottling fees; as part of manufacturing process, the TMUs affix the labels containing the brand names of the appellant o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... zation) is erroneous. 3. Shri G. Shivadass, Sr. Advocate, Learned senior Counsel, assisted by Shri K. S. Ramesh, Advocate and Shri Rishab, Advocate appeared for M/s USL. Learned Senior Counsel submits that the IMFL manufactured by the appellant fall under the category of "alcoholic liquor for human consumption" and are the subject matter of legislative powers of the State under Entry No 53 of List II of the Seventh Schedule to the Constitution.; accordingly, the respective State Governments are empowered to frame rules and regulations for the manufacture, storage, distribution, retail sale, etc. of such goods, including inter-state transactions thereon. He submits that the companies which own /hold registered brands in relation to IMFL (commonly known in the industry as Brand owners or BOs) who have the technical knowhow for the manufacture of Alcoholic beverages, have exclusive right to exploit the brands, including by way of sale of IMFL under their brands; the whole process of procurement, manufacture and sale of IMFL is governed by various State Excise legislations; in order to comply with the respective State Excise laws and to ensure that they get the IMFL manufactured in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... they are in a position to supervise and control the manufacturing activity so as to meet their exact specifications; CBU is paid job charges known as bottling fee/ Retention fee. He submits that the liquor so manufactured is invoiced by the CBU on account of the brand name owner; sales proceeds are credited to a joint bank account in the name of both the CBU and the brand name owner, but the account is operated by the brand name owner only through their personnel; in case where the Bank Account is in the name of CBU's, the account is operated by Brand owner personnel; brand name owner pays out of this account all the expenses to be met; net proceeds represent the brand name owner's operating profits of the transactions. He submits that in this back ground, products containing appellants brand names are manufactured by other CBUs / Tie up units; the appellant would negotiate the consideration for utilizing the manufacturing facility and other services provided by CBUs / Tie up units; this amount, together with the actual cost of production is known as Ex-Distillery Price (EDP); in circumstances where the CBUs / Tie up units are allowed by law to transfer the finished products to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the provisions of the Trade Marks Act; transactions in intellectual property are in the nature of either absolute transfer of right over the intellectual property or licensing them for use, with specified conditions; the person receiving such licence from the owner of the intellectual property would exploit such intellectual property for his commercial use and from out of the revenue generated by him through such exploitation, an agreed portion will be paid back to the owner of the intellectual property, normally in the form of royalties; the relationship between the transferor and the transferee will be on principal to principal basis; intellectual property rights are goods and the taxation of transactions with regard to transfer of right to use such goods (IPRs) are the subject matter of State legislation; consideration received for transfer of right to use such goods cannot be subjected the levy of service tax; only the services which are "in relation to" transfer of right to use IPR can be covered under taxable service and not transfer of IPR per se; appellant have not at all rendered any Intellectual Property service within the meaning of section 65(105)(zzr) to the CBUs / ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices itself; appellant has not provided any service to the CBUs in relation to intellectual property services; he relies on the decision of Delhi High Court in the case of M/s. Home Solutions retail India 2011(21) STR-109 (Del); the said decision has not been overruled by any decision and therefore relevant; the definition of taxable service has not been amended even after the said decision of Delhi High Court; he further relies on the decision of the Hon'ble Maharashtra Sales Tax Tribunal, in the case of M/s Diageo India (P) Limited VS. The State of Maharashtra; The State of Maharashtra sought to demand sales tax on the amounts received by the brand owner like the appellant, from their Contract Bottling Units, on the ground that the said activity would amount to "transfer of right to use the trade mark", as contemplated by Article 366 (29A)(d) of the Constitution. He submits that Hon'ble Sales Tax Tribunal M/s Diageo India (P) Limited Vs The State of Maharashtra has held that the CBUs / Tie up units are functioning under the control and supervision of the Brand Owners and the manufacturing activity is carried on only for and on behalf of the Brand owners; the permission granted to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ioner has failed to appreciate that in all such cases of manufacture for Brand owner, there has to be an agreement permitting use of such intellectual property rights and such agreements have been entered into in terms of Section 48 (2) of the Trade Marks Act 1999; permission granted by the appellant is for the limited purpose of enabling the CBU to manufacture; merely because the Licensing agreements or Usership agreements permit the CMUs/CBUs to use the same for manufacture of IMFL for the Brand owner and some consideration is payable by the CMU/CBU to brand owner, the same cannot be treated as an agreement for transfer of Intellectual property; he relies on M/s. Panipat Woollen and General Mills co Ltd 1975 SCR 186, wherein it was held that in order to construe an agreement, one has to look into the substances or the essentials of it rather than to its form; in the instance case primary objective is to get IMFL manufactured; allowing the use of brand is secondary; the amounts received by the appellants represent the business profits of brand owner and subject to direct tax and not a consideration for intellectual property service; in such circumstances, only the CBUs / Tie up un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ished products, which are either supplied to State owned Corporations or the open market as per individual State policies; The effective constructive ownership of the IMFL so manufactured /bottled at the CBUs, vest with the appellants. He submits that in respect of Brand Licensing Arrangement (for Packaged Drinking Water) manufacturing activity falls within the purview of Central Excise; appellants wield no control over production of Packaged Drinking Water; brands are licensed to a Contract Bottler who manufactures and markets 'Packaged Drinking Water' at his sole discretion; appellants have no control over quality, packing, labelling, records of production/ dispatch/sales etc; appellants have no control over sale proceeds except receiving an agreed sum as royalty or license fee apart from technical know-how fee in lieu of the technical know-how agreement; applicable Statutory levies i.e., Central Excise, Sales Tax/VAT etc., are paid by the Licensee; Licensee retains the entire sale proceeds. Profits or Losses, if any, are to the account of the Licensee; Licensee wields absolute control over supply of finished product and the effective ownership of the products vests with the Lice ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... temporarily, or (b) permitting the use or enjoyment of intellectual property and intellectual property; in terms of Section 65(55a) intellectual property means - any right to intangible property, namely trademarks, designs, patents or any other similar intangible property under any law for the time being in force, but does not include copy right; * technical knowhow for manufacture of IMFL or deputing the personnel for supervision of production was not recognized as an intellectual property or the activity; * technical knowhow is not covered under the residuary clause "Any other similar intangible property"; there is no specific independent law recognizing technical knowhow as an intellectual property in India; * the process of manufacturing IMFL by the appellant was not patented process; when the agreement was not providing for a specific consideration for the taxable activity the authorities could not have attributed any value of taxable service on their own unless it was provided in the statute * no consideration is made attributable for technical knowhow; * Decision in (i). M/s. Modi Mundi Pharma Beauty products Pvt Ltd 2020-TIOL-859-CESTAT-DEL (ii). Wind Power Blade ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not liable to service tax; even GST is not leviable on the said surplus; therefore, the contention of the revenue that the entire amount received the brand owners is liable to be subjected to service tax is not legally sustainable; revenue appeals requires to be rejected. 9.2. Submissions on Cenvat Credit: He submits that at the outset the activity in dispute is not liable to service tax; in any case the appellant is not disputing the levy in respect of brand franchise agreements for manufacture of packaged drinking water and Soda; Commissioner rightly held that the appellant is eligible to CENVAT credit on advertising; majority of the advertisements are mainly for advertisement of mineral water and soda; the said advertisement cannot be said to have been used for the promotion of IMFL; therefore, these credits should be eligible fully for taxable supplies and cannot be subjected to the provisions of Rule-6 of CENVAT Credit Rules. He submits that in their own case the Tribunal while considering the stay application reported in 2011(23) STR 655 (Tribunal-Bangalore) held that limit of utilization of CENVAT Credit; alcoholic beverages are not excisable goods and do not fall under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 74/2021; moreover, because of the prevailing ambiguity CBEC itself clarified the taxability; therefore, extended period cannot be invoked; no penalty is leviable under Section 78. 11. Smt. D. S. Sangeetha, Addl. Commissioner, Authorised Representative, appearing for Revenue reiterates the findings of the impugned order as far as the appeals filed by M/s United Spirits and others are concerned, she reiterates the grounds of appeal as far as Revenue appeals are concerned. 12. Heard both sides and perused the records of the case. We find that the issues before us for consideration are as follows: (i) Whether the appellants have rendered Intellectual Property Service in respect of the permission granted by them to the CBUs / TMUs to affix the brand name / trade name belonging to them on the IMFL manufactured, under Section 65(105) (zzr) of the Finance Act 1994 and liable to service tax; (ii). If so, what should be the value of taxable service; whether it is 2% of net sale realization as held by the Commissioner or the total amount paid by the CBUs / TMUs as contended by Revenue in their appeals; (iii). whether the appellants are eligible for CENVAT credit; (iv). whether exten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pellants are simply getting the alcoholic beverages manufactured by them. We find that the appellant's contention is correct and it has been held in Rashtriya Ispat Ltd. Vs Commercial Tax Officer- 77-STC-182 (AP), Hon'ble High Court of Andhra Pradesh held that: "In our view whether the transaction amounts to transfer of right or not cannot be determined with reference to a particular word or clause in the agreement. The agreement has to be read as whole, to determine the nature of the transaction. From a close reading of all the clauses in the agreement, it appears to us that the contractor is entitled to make use of the machinery for purpose of execution of the work of the petitioner and there is no transfer of right to use as such in favour of the contractor. We have reached this conclusion because the effective control of the machinery even while the machinery is in the use of the contractor is that of the petitioner company. The contractor is not free to make use of the same for other works or move it out during the period the machinery is in his use. The condition that he will be responsible for the custody of the machinery while the machinery is on the site does not militat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ill be on monthly/quarterly basis. After deducting the amounts mentioned above, the balance shall be sent to McD. It is made clear that this excess amount belongs only to McD and no part can be deal or withheld for any reason whatsoever by AJANTA. 15.4. At Para 9(c) of the License Agreement, it is agreed that: the Licensee shall not be entitled to any kind of financial assistance from the Licensor. It is the responsibility of the Licensee to make independent arrangements for its finance requirements and ensure that there is uninterrupted production of IFML products of the Licensee during the currency of this Agreement. 15.5. At Para 12 of User ship Agreement, it is stated that: the User shall not use any name, any corporate name, trading style, trading name, title of establishments or other commercial designation with the words or marks representing the Trade Marks, which are identical with/deceptively similar to any of the Trade Marks mentioned in the Schedule hereunder written. any business name incorporating any of the trademarks or such other The User shall not register any company name or trade mark or make use of names or marks or incorporating any similar sounding name ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w albeit the manufacturing activity is outsourced to the Contract Bottling Units. The ultimate beneficiary of the technical know-how are the intellectual property if any for that matter is the appellant themselves and therefore, it is incorrect to say that there is any transfer of temporary leasing of intellectual property. Therefore, we find that the entire case of the Department is based on a false surmise. 18. We find that the issue is no longer res integra and is decided in favour of the appellants. The Apex Court has decided a similar case in respect of M/s BDA Pvt. Ltd. (supra) holding that in such cases, the brand owner does not give any right to the TMU to use his brand. Hon'ble Apex Court has upheld the finding of CESTAT in the case as under: 4...."Profit earned by brand owner of Indian Made Foreign Liquor (IMFL) for getting its products manufactured on job work and sale by such worker cannot be taxed as royalty under Intellectual property service as job worker has not been given right to use assessees's brand name. As per agreement, cost of raw material and other expenses either paid or reimbursed by assessee. Further State levies such as Excise or VAT reimbursed to jo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or mineral water and soda and not for promotion of IMFL therefore the credit should be fully eligible. They further submit that the limit of utilisation of CENVAT Credit in terms of Rule 6(3) (c) is not applicable as alcoholic beverages are not excisable goods and do not fall under exempted goods and therefore, they are eligible to take CENVAT credit without limitation of 20%. However, We find that learned Commissioner observes that the appellant was not found to have furnished any evidence or argument that without the use of such input services, they would not be able to provide the output service i.e. Intellectual Property Service, to the satisfaction of the recipient of the output service; therefore, he considers that the credit availed by the appellants on all such aforesaid input and services, considering them to be input and input services, are not eligible to CENVAT credit, as such input services are not found to fulfil the definition of input and input service as defined in the CENVAT Credit Rules. Learned Commissioner has also found that the appellants have not maintained separate records for inputs/ services used in dutiable as well as exempted output /services and theref ..... X X X X Extracts X X X X X X X X Extracts X X X X
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