Pradeep Jain - Chartered Accountant

CASE STUDY

INTRODUCTION

Under the Cenvat Credit Scheme, cenvat credit can be availed by an assessee on the Capital goods, inputs and input services. The definitions of what will constitute inputs, capital goods and input services have been given in the Cenvat Credit Rules, 2004. However, the definitions given are not absolutely clear and leave much room for interpretation. The services which are utilised in or in relation to manufacture of finished goods are said to be input services. Certain other services have also been specified in the inclusive definition of input services. In the case under study, the assessee was utilizing the service of advertising and sales promotion of aerated beverages which were being prepared by the bottling factories. The assessee was manufacturing the concentrates used in the said aerated beverages. Whether it can be said that the services of advertisement and sales promotion utilised by the assessee were input services for him and cenvat credit was, therefore, available to him, is the issue dealt in the case under study.

RELEVANT PROVISIONS

Rule 2 (l) of the Cenvat Credit Rules, 2004: -

(l) "input service" means any service,-

(i) used by a provider of taxable service for providing an output service; or

(ii) used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products, upto the place of removal,

and includes services used in relation to setting up, modernization, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises, advertisement or sales promotion, market research, storage upto the place of removal, procurement of inputs, activities relating to business, such as accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, and security, inward transportation of inputs or capital goods and outward transportation upto the place of removal;

Coca Cola India (P.) Ltd v/s Commissioner of Central Excise, Pune-III

{[2009] 22 STT 130 (BOM)}

BRIEF FACTS OF THE CASE

- Appellants are manufacturers of non-alcoholic beverages bases or concentrates. These concentrates are known and sold under the respective brand names such as Coca Cola, Fanta, etc.

- The concentrate is sold by the Appellants to bottling companies, who in turn sell the aerated beverages manufactured from the concentrates to distributors and who in turn sell it to retailers for the ultimate sale to the consumer.

- The advertisement and sales promotion activities including market research are undertaken by the Appellant. There are different types and forms of advertisement, in all forms of media print, television, radio, etc.

- The brand name and trade mark is licensed in favour of the Appellants by the Coca Cola Company, USA.

- Appellants were availing cenvat credit of the service tax paid on advertising services, sales promotion, market research and the like and were utilizing such credit towards payment of excise duty on the concentrate.

- Benefit of Cenvat credit on was denied to the Appellants on the ground that that the advertisements do not relate to concentrates manufactured by the Appellants but the aerated beverages prepared by the bottling companies.

- The Tribunal as well as the lower authorities denied cenvat credit to the appellants. Hence, appellants are before the High Court.

QUESTION FOR CONSIDERATION

The appeal was admitted in the High Court for consideration of the following questions: -

(a) Whether services of advertising and marketing procured by the Appellants in respect of advertisements for aerated waters are covered by the definition of the words ‘input services’ as defined in rule 2(l) of the CENVAT Credit Rules, 2004, when admittedly the Appellants manufacture concentrates exclusively used for the manufacture of the respective aerated waters which are advertised by the Appellants?

(b) Whether the advertisement or sales promotion of aerated waters undertaken by manufacturer of concentrate is covered by the inclusive part of the definition of ‘input service’ contained in rule 2(l) of the CENVAT Credit Rules, 2004?

JUDGMENT OF HIGH COURT

v High Court held that it is now judicially recognized that Service tax is VAT which in turn is destination based consumption tax in a sense that it is on commercial activities and is not a charge on the business but on the consumer. Just as excise duty is a tax on value addition on goods. Service tax is on the value addition by rendition of service.

v Regarding the expression “means and includes” used in the definition of input service, High Court relied upon the judgments given in Regional Director v. High Land Coffee Works [1991 (3) SCC 617] and Bharat Coop. Bank (Mumbai) Ltd. v. Coop. Bank Employees Union [AIR 2007 SC 2320] and held that it is clear that the expression “means and includes” is exhaustive. By the word includes services which may otherwise have not come within the ambit of the definition clause are included and by the words means these are made exhaustive.

v The words “such as” were interpreted and judgment in the case of Good Year India Ltd. v. Collector of Customs [1997 (95) ELT 450] was relied upon alongwith various dictionaries. It was held that the words “such as” therefore are illustrative and not exhaustive. In the context of business, these are services, related to the business. They may not be exhaustive, but are illustrative.

v The expression “business” was interpreted in light of judgments given in cases of Pepsi Foods Ltd. v. Collector 1[996 (82) ELT 33], Pepsi Foods Ltd. v. Collector [2003 (158) ELT 552 (SC)] and State of Karnataka v. Shreyas Paper (P.) Ltd. [AIR 2006 SC 865]. It was held that the expression ‘Business’ is an integrated/continuous activity and is not confined restricted to mere manufacture of the product. Therefore, activities in relation to business can cover all the activities that are related to the functioning of a business. The term ‘business’ therefore, cannot be given a restricted definition to say that business of a manufacturer is to manufacture final products only. The term ‘business’ therefore, particularly in fiscal statutes is of wide import.

v The phrase “activity relating to business” employed in the definition of input services was interpreted by relying upon the judgments in the case of Doypack Systems (P.) Ltd. v. Union of India [1988 (36) ELT 201]. It was held that the words “relating to” further widens the scope of the expression activities relating to business. The expression “relating to” widens the scope of the definition.

v Similarly, the use of the word “activities” in the phrase ‘activities relating to business’ was also interpreted and it was held that the use of said words further signified the wide import of the phrase “activities relating to business”. The Rule making authority has not employed any qualifying words before the word activities, like main activities or essential activities etc. Therefore, it must follow that all and any activity relating to business falls within the definition of input service provided there is a relation between the manufacturer of concentrate and the activity. Therefore, the phrase “activities relating to business” are words of wide import.

v High Court held that it was clear that the burden of service tax must be borne by the ultimate consumer and not by any intermediary i.e., manufacturer or service provider. In order, to avoid the cascading effect, the benefit of Cenvat credit on input stage goods and services must be ordinarily allowed as long as a connection between the input stage goods and services is established. Conceptually as well as a matter of policy, any input service that forms a part of the value of the final product should be eligible for the benefit of Cenvat credit.

v The High Court further held that the definition of input service can be effectively divided into the following five categories, insofar as a manufacturer is concerned :

(i) Any service used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products,

(ii) Any service used by the manufacturer whether directly or indirectly, in or in relation to clearance of final products from the place of removal,

(iii) Services used in relation to setting up, modernization, renovation or repairs of a factory, or an office relating to such factory,

(iv) Services used in relation to advertisement or sales promotion, market research, storage upto the place of removal, procurement of inputs,

(v) Services used in relation to activities relating to business and outward transportation upto the place of removal.

Each limb of the definition of input service can be considered as an independent benefit or concession or exemption. If an assessee can satisfy any one of the limbs of the above benefit, exemption or concession, then credit of the input service would be available. This would be so even if the assessee does not satisfy other limb/limbs of the above definition.

v High Court further held that the principle that a specific provision will override a general provision is not applicable to provisions which are in the nature of concessions or exemptions. Reliance was placed on the judgment given in the case of HCL Ltd. v. Collector of Customs [1998 (77) ECR 126 (T)].

In context of the case, it was held as under: -

v High Court held that a consumption tax derives its name from the fact that tax burden is ultimately borne by the final consumer and business does not bear the burden of the tax, since the business are allowed to take credit of tax paid on inputs supplied/received by them. If therefore Cenvat is denied to the input service received by the appellant herein, they will become burden to the appellant, which is against the very grain or principle of VAT being a consumption tax.

v It was held that service tax, therefore, paid on expenditure incurred by the assessee on advertisements sales promotion, market research will have to be allowed as input stage credit more particularly if the same forms a part of the price of final product of the assessee on which excise duty is paid. In other words, credit of input service must be allowed on expenditure incurred by the assessee which form a part of the assessable value of the final product. If the above is not done, as sought to be done by the department in the present case, it will defeat the very basis and genesis CENVAT i.e., value added tax.

v High Court relied upon the Explanatory note by HSN to Heading 21.06 and held that the said note proves an integral link between concentrate manufactured by the assessee and the beverage (aerated water) manufactured by the bottler from it. The concentrate manufactured by the appellant is classified and assessed to Cenvat (excise duty) under heading 21.06 by the Schedule to Central Excise Tariff Act, 1985. That heading is identical to heading 21.06 of organised system of nomenclature issued by WCO.

v The relevant extract of the Explanatory note was considered and it was found that the concentrates contain the flavouring ingredient are characteristics of a particular beverage. The beverage in question was obtained simply by diluting the preparation with water, sugar and carbon dioxide gas.

v It was further held that the Explanatory Note also explained the rational for business being arranged in this industry in a particular manner. The method of doing business adopted by the appellants avoids unnecessary transport of large quantity of water. In addition, the bottles and crates have to be collected back from the shopkeepers or dealers and taken back to the factory for filling the fresh batch on a constant basis. At all times, quality of beverage, marketing support of the beverages is done by the brand name holder-cum-concentrate manufacturer.

v It was held that Revenue’s contention that the advertisement and/or marketing in the appellant’s case is not connected with the manufacture of concentrates but with the sale of aerated water manufactured out of the concentrates by the bottlers and not appellant and therefore, not covered under second part of definition of input; if accepted would go against the very core and genesis of Cenvat credit scheme. High Court held that such an interpretation would be plainly unacceptable.

v In the end, High Court held that the credit was availed on the tax paid on the input service, which was advertisement and not on the contents of the advertisement. Thus it was not necessary that the contents of the advertisement must be that of the final product manufactured by the person advertising, as long as the manufacturer could demonstrate that the advertisement services availed had an effect of or impact on the manufacture of the final product and established the relationship between the input service and the manufacture of the final product. The manufacturer thereby could avail the credit of the service tax paid by him. Once the cost incurred by the service has to be added to the cost, and is so assessed, it is recognition by the revenue of the advertisement services having a connection with the manufacture of the final product. This test will also apply in the case of sales promotion.

DECISION OF HIGH COURT

Question (a) is answered in the affirmative in favour of the assessee and against revenue and question (b) again answered in the affirmative in favour of the assessee and against revenue.

Impugned orders of Commissioner (A) and the Tribunal set aside. Matter restored to the Commissioner to pass appropriate order in the light of judgment given by the High Court in this appeal. Appeal disposed off accordingly.

COMMENTS & CONCLUSION

It was rightly held that credit of service tax paid on advertisement service and sale promotion service by the Appellant-assessee was admissible especially when such expense was included in the price of final product on which excise duty was paid. It was rightly held that these services were input services for the appellant. If the cenvat credit would not have been allowed, then the appellant-assessee would have borne the burden of service tax paid on the said services, which would have lead to defeating the purpose of the Cenvat Credit Scheme.

This is a landmark judgement and will decide the number of cases pending at various forums. It has been held that the “input services” is very broad and all expenditure incurred in relation to business will be allowed.

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PJ/CASE STUDY/2009-10/012
30 September 2009

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PJ/CASE STUDY/2009-10/012 30 September 2009

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PJ/CASE STUDY/2009-10/012
30 September 2009