Custom, Excise & Service Tax Tribunal
United Spirits Ltd vs Bangalore Service Tax- I on 10 August, 2022
ST/386-391/2010
CUSTOMS, EXCISE & SERVICE TAX APPELLATE TRIBUNAL
BANGALORE
Service Tax Appeal No. 386 of 2010
[Arising out of Order-in-Original No. 49 - 51/2009 dated 27/11/2009
passed by the Commissioner of Service Tax, Bangalore.]
M/s UNITED SPIRITS LTD
U.B. TOWER, 24, VITTAL MALLYA ROAD, Appellant(s)
BANGALORE
VERSUS
The Commissioner of Service Tax
1ST TO 5TH FLOOR,
TTMC BUILDING,
Respondent(s)
above BMTC BUS STAND,DOMLUR BANGALORE - 560 071.
KARNATAKA WITH
(i) Service Tax Appeal No.387 of 2010 (M/s. United Spirits Ltd. vs. Commissioner of Service Tax, Bangalore.)
(ii) Service Tax Appeal No.388 of 2010 (M/s. United Spirits Ltd. vs. Commissioner of Service Tax, Bangalore.)
(iii) Service Tax Appeal No.389 of 2010 (Commissioner of Service Tax, Bangalore vs. M/s. United Spirits Ltd.)
(iv) Service Tax Appeal No.390 of 2010 (Commissioner of Service Tax, Bangalore vs. M/s. United Spirits Ltd.)
(v) Service Tax Appeal No.391 of 2010 (Commissioner of Service Tax, Bangalore vs. M/s. United Spirits Ltd.) [All arising out of Order-in-Original No. 49 - 51/2009 dated 27/11/2009 passed by the Commissioner of Service Tax, Bangalore.] Appearance:
Shri G. Shivadass, Sr. Advocate, Shri K. S. Ramesh, Advocate and Shri Rishab, Advocate (SWAMY ASSOCIATES) for the Appellant.
Smt. D. S. Sangeetha, Addl. Commissioner, Authorised Representative for the Respondent.
CORAM:
HON'BLE SHRI S.K. MOHANTY , JUDICIAL MEMBER HON'BLE SHRI P. ANJANI KUMAR, TECHNICAL MEMBER 1 ST/386-391/2010 Final Order No. 20267-20272/2022 Date of Hearing: 27/04/2022 Date of Decision:10/08/2022 Per : P ANJANI KUMAR 3 Appeals No. ST/386-388/2010 are filed by the appellant-
assessee M/s. United Spirits Limited (M/s USL) and 3 Appeals No. ST/389- 391/2010 are filed by Revenue. All of them arise out of three SCNs, issued to the appellants, and decided by OIO.NO.49-51/2009 dated 27.11.2009, passed by The Commissioner of Service Tax, Bangalore.
2. Briefly stated the facts of the case are that M/s USL is engaged in the business of manufacture and sale of Indian Made Foreign Liquor (IMFL), under various brand names, such as McDowell No.1, Signature, Single Malt, Golden Grape Brandy, Bagpiper etc; M/s Herbertson Limited ("HL"), also 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 on the IMFL.
2.1. Three Show Cause Notices that the mandate of the appellant to affix the labels and deputing its people for supervision of the production is in the nature of rendering of intellectual property services in favor of TMUs; net 2 ST/386-391/2010 sale proceeds remitted by the TMUs is a consideration for such services and that such amounts would be liable to service tax under the said category of taxable service; Cenvat credit availed by the appellant was also sought to be disallowed on the grounds of ineligibility. All the three SCNs were adjudicated by the impugned order holding that:
(i) The mandated activities / services provided by the assessee to the CBU‟s / TMU‟s in accordance with the relevant agreement is classifiable under the category of intellectual property service defined in Section 65(55b) of the act read with Section 65 (105) (zzr) and
(ii) The taxable value of such intellectual property service rendered by the assessee is 2% of net sale realization of the IMFL manufactured by CBUs / TMUs except in the case of KBDL.
(iii) The service tax liability of Rs.13, 15, 91,471/- for the period 10.09.2004 to 30.09.2007 covered in 3 SCNs is liable to be recovered.
(iv) The assessee is eligible to CENVAT credit only in respect of the advertising services used for promotion of intellectual property. However, since the said brand names are also used for IMFL the CENVAT Credit has to be restricted to 20% of service tax payable in terms of Rule-6 of CENVAT Credit Rules 2004; as the assessee has discharged entire service tax liability utilizing CENVAT credit, and by not following the provisions of Rule-6 such utilization is erroneous; therefore, the CENVAT credit of Rs.10, 17, 92,834 wrongly utilized is liable to be recovered.
(v) The extended period of limitation is applicable; assessee is liable to penalty under Sections 76, 77 and 78 of Finance Act 1994.
2.2. Aggrieved by the impugned order confirming the demand of ST holding that the activity is liable to service tax and to the extent indicated below, the appellant is now in appeal before the Hon‟ble Tribunal and their appeals No ST/386-388/2010; Revenue has also filed the appeals No. ST/389- 391/2010.against the impugned order on the ground that the service tax is leviable on the entire amount paid by the CBU to the brand owner and the impugned order confirming demand only on 2% of NSR (Net sale realization) 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.
3ST/386-391/2010 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 their brand names the brand owner‟s approach various third parties contract Bottling units and enter into agreements with them.
3.1. Learned senior counsel explains the 3 types of agreements as below.
(i). Agreement for Tie up manufacture of IMFL Products: the appellant gets its IMFL manufactured by the CBUs/TMUs under the appellant‟s direct supervision and control; CBUs/TMUs sell such IMFL to the appellant, or directly to others as per appellant‟s directions; if the sale is made by the CBUs / Tie up units to the appellant, such sale would be at the "Ex-Distillery Price - EDP", which is based on cost of manufacture of the IMFL plus the retention amount; if the sale is to others, such sales would be made at the price fixed by the appellant; out of the sale proceeds realized, CBUs / Tie up units, are allowed to retain the cost of manufacture paid for by them and their consideration (retention charges) and remit the balance amount to the appellant.
(ii). Licence Agreement / Usership agreement: the appellant gets the CBUs / Tie up units to affix the labels containing its brand names on the IMFL. Manufactured by the CBUs/TMUs; while License Agreement would cover those brand names whose registration, in the appellant‟s name, is pending, the Usership Agreement would refer to those brands already registered in the name of the appellant.
4ST/386-391/2010
(iii). Agreement for brand franchise: these agreements are with independent manufacturers of packaged drinking water and soda with the brand name of the appellant company; the appellant has allowed the use of their brand name for manufacture and sale of water and soda; the appellant collects only a Royalty as prescribed in the agreement; no control is exercised on such manufacturing units by the appellant; risk and reward of business lies with the licensee; there is no dispute regarding taxability of this aspect.
3.2. under the agreements for manufacture of IFML, the appellant will bear all the cost of production; directs the contract bottling unit to procure the Raw/Packing materials from specified sources and at the price negotiated by the Brand Owner; in some of the cases the Brand owner himself supplies the Special Spirits; the brand owner will either directly pay the suppliers of these goods to the CBUs, or reimburse the payments made by the CBUs; the brand owners also depute their technical staff to the CBUs so that 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 the appellant, they would be transferred at EDP, i.e. the appellant would pay the EDP to the CBUs / Tie up units. He submits that wherever the CBUs / Tie up units are required by local laws to sell the finished products to other parties (State Controlled agencies or holders of 5 ST/386-391/2010 wholesale licenses), they would sell it at the Market Price fixed by the appellant and transfer the difference between such selling price and EDP to the appellant.
3.3. Learned senior counsel submits further that the entire manufacturing activity in the CBUs / Tie up units would be done as per the appellant‟s instructions and according to the appellant‟s specifications and under the supervision of the appellant‟s Executives, placed at the premises of the CBUs / Tie up units; entire Marketing activity would be done by the appellant including Advertisement & Sales Promotion; the manufacturing facility/ infrastructure of the CBUs / Tie up units would be utilized by the appellant to manufacture the appellant‟s products; by way of various agreements, the appellant are able to get their products manufactured using manufacturing facilities of CBUs / Tie up units; CBUs are not allowed to commercially exploit the brand name of appellant, but the permission is granted to the CBUs to use the brand name to enable CBUs to manufacture IMFL with appellant‟s brand name; wherever the CBUs / Tie up units are required by local laws to directly bill the State Agencies /Customer (as per State Excise Laws) at rates fixed by the appellant, the difference between such Selling Price and the EDP as negotiated by the two parties would be passed on to the appellant by the CBUs / Tie up units; same is accounted under the head "Income from Sale by manufacturers under „tie-up‟ agreements "and "Income from Brand Franchise"; Service tax is sought to be levied on this income treating the same as value of Intellectual Property Services rendered by the appellant to the CBUs / Tie up units, whereby the CBUs / Tie up units were allegedly allowed to use the brand names owned by the appellant.
4. Learned senior counsel takes us through the statutory definitions of "intellectual property service" during the relevant period and submits that the Appellant have not at all rendered intellectual property service; the alleged intellectual property in this case are the various brand names, owned by the appellant, which are governed 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 6 ST/386-391/2010 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 / Tie up units; true purport and nature of the transaction involving rendering of intellectual property service has been misconceived by the department.
4.1. Learned senior counsel submits that the allegation that the appellant have rendered intellectual property services is not in tune with the statutory provisions; one of the conditions for attracting the provisions of Section 65(105)(zzr), is that there must be „transfer‟ of intellectual property right; „Transfer‟ means the positive act which is performed by the parties with an intent to transfer the subject matter; „transfer‟ has to be ascertained from the intention of the parties to such act; in the instant case the appellant never intended to transfer the intellectual property right, i.e the trademark, in favour of CBUs / Tie up units; intention of the appellant is to get the IMFL with their Trade Marks manufactured in the CBUs / Tie up units, is evident from the agreements. He submits that another condition precedent for treating an act as a „transfer‟ under an agreement is that the agreement is entered in to between the parties with a dominant purpose of the „transferring‟; the agreements in the impugned case suggests that the transfer of IPR is only incidental or ancillary to any other dominant purpose enshrined therein; such transfers are not contemplated for the purpose of levy of service tax. He submits also that another criterion to determine the existence of "transfer of an IPR" is to find out whether "effective control"
over the IPR has been made over to the transferee; he relies on judgement of High Court of Andhra Pradesh in the case of M/s Rashtriya Ispat Nigam Limited Vs. Commercial Tax officer 77 STC 182 and submits that by 7 ST/386-391/2010 applying the above and on a combined reading of the agreements between the appellant and the CBUs/Tie up units, it must be concluded that the appellant never transferred the right to use the IPR in favour of the CBUs/Tie up units and effective control over the IPR were never given to CBU‟s/Tie up Units.
4.2. Learned senior counsel submits that under Section 65(105)(zzr) is "Taxable service‟ should be provided to any other person by the holder of intellectual property rights in relation to intellectual property; service which could be charged to tax are those services which are provided in relation to intellectual property services and not the intellectual property services 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 use the trade marks by the CBUs / Tie up units is incidental to the manufacturing agreement and to facilitate it and the use of such trade marks by the CBUs / Tie up units is only for the purpose of manufacture on behalf of the Brand owner; CBUs / Tie up units cannot use the trade marks for any other purpose; accordingly, the Tribunal came to the conclusion that there has been no transfer of right to use the trade marks by the Brand Owner to the CBUs; in the appellants case also they have not at all transferred the right to use the brand name to the CBUs / Tie up units and 8 ST/386-391/2010 hence, not at all rendered any intellectual property service to the CBUs/Tie up units.
5. Learned senior counsel submits that only the CBUs / Tie up units are rendering service to the appellant; the CBUs / Tie up units have been engaged by the appellant to manufacture IMFL, under the appellant‟s direct supervision. He submits that agreements were made with those who have distillery and requisite Licence and that such licenses are non-assignable; the raw materials required for the manufacture of IMFL would be purchased by the CBUs as per standards and specifications and at the price fixed by the appellant; the blending and bottling should also be as per the specifications provided by the appellant; specifications and monthly / quarterly production schedule is fixed by the appellant; price of such IMFL would be decided and fixed by the appellant; appellant would have the right of quality control, inspection, sampling; The appellant would provide all technical support and depute their technical personnel / Quality control personnel to the premises of the CBUs;
IMFL manufactured by the CBUs shall be sold to the appellant or as per the appellant‟s directions only (as per clause 2 (n)); sale proceeds will be deposited in an account to be operated by the appellant‟s personnel and the CBUs are entitled to retain only the retention money; trademarks are the appellant‟s property and the CBUs cannot claim any right, title or interest therein; the extent of control being exercised by the appellant over the CBUs / Tie up units is evident from facts and various provisions contained in the Agreement for Tie up manufacture; it‟s important to note that the appellants are incurring many expenses relating to the activity of manufacture of IMFL by CBUs.
5.1. Learned senior counsel submits that the Commissioner 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 9 ST/386-391/2010 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 units are rendering services to the appellant, which are in the nature or "production or processing of goods, for and on behalf of the client" which is covered in the definition of "business auxiliary service"; the definition of the term "business auxiliary service", as per Section 65 (19) of the Finance Act, 1994, specifically excludes activities amounting to "manufacture", as envisaged in Section 2 (f) of the Central Excise Act, 1944; IMFL is not subjected to any duty of excise.
5.2. Learned senior counsel submits that CBEC issued Circular dated 27.10.2008; it could be seen that the aforesaid Circular clarifies that brand franchise agreements (which are covered under Para 2) are the cases where the brand owner is providing taxable services under the category of intellectual property service; the circular also clarifies that in the contract manufacturing arrangement (the cases covered in Para 3.1 of circular), the CBU is the service provider; crux of the issue remains as to whether the agreements for contract manufacturing entered into by the appellant are covered under Para 3.1 of the Circular; Commissioner has given a categorical finding that the present case of CBUs falls under Para 2 of the circular, which is apparently erroneous; agreements for brand franchise for manufacture of packaged mineral water and Soda, are akin to the case explained in Para 2; arrangement for manufacture of IMFL are clearly covered under Para 3.1 of Circular.
5.3. Learned senior counsel submits that there are differences between contract manufacture of IMFL and brand licensing for manufacture and sale of Soda/packaged drinking Water are as follows. He submits that in respect of Contract Manufacturing Arrangement (for IMFL), manufacturing activity falls within the purview of State Excise; the appellant have absolute control over manufacture of IMFL, right from the stage of procurement of raw-
10ST/386-391/2010 material till dispatch; they exercise complete control over quality, packing, labelling, records of production/dispatch/ sales etc. sale proceeds are channelled through bank accounts, controlled and operated appellants; Statutory levies, i.e., State Excise Duty/franchise fee, brand registration fee etc., are paid/ reimbursed by the appellant; CBU retains the EDP including retention amount and balance amount is transferred to the appellant; appellants have absolute control over supply of finished 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 Licensee. He submits that at best there can be an allegation of rendering intellectual property service to these manufacturing units, as clarified by the CBEC, in its circular dated 27.10.2008; they have been discharging ST on the entire amount of Royalty received from the manufacturers of drinking water and soda.
6. Learned Senior Counsel submits that CBEC vide instruction F.No.332/17/2009/TRU dated 30.10.2009, clarified that the surplus profit earned by the brand owner being in the nature of business profits (which falls within the purview of direct taxes) will not be changeable to Service tax; the issue has become settled by various CESTAT decisions that service tax is not leviable on the brand owner surplus received by the brand owners from the CBUs; demand of service tax on the activity of permitting the CBUs 11 ST/386-391/2010 to use the brand name and Trade mark is not legally sustainable; he relies on the following.
M/s.Diageo India Pvt Ltd Vs. Commissioner of Central Excise Thane 2013(32) STR-254 (Tri.Mum) M/s. SKOL Breweries Lid Vs. CCE Aurangabad 2014(35) STR- 570(Tri.Mum) M/s. BDA Pvt Ltd Vs. CCE Meerut 2015(40) STR-352(Tri.Del), affirmed by 2016(42) STR-J143(SC) M/s. Radico Khaitan Ltd Vs.CCE Delhi 2016(44) STR-133 (Tri.Del) M/s.Jagajit Indsutries 2016(10) TMI 309 (CESTAT-Chandigarh) M/s. Pernod Ricard India Pvt Ltd Vs. CST Del -
7. Learned senior counsel submits that Commissioner (Para 48 of the impugned) held that the intellectual property emerges from application of intellect, which may be in the form of invention, design, product process, technology, goodwill etc; in the instant case in terms of the relevant agreements extracted above, the assessee is clearly committed to provide technical knowhow, technical assistance by way of providing their trained and experienced personal to the CBUs for complete supervision of the production quality control, packing etc; said activity is liable to service tax; this finding is not legally sustainable for the following reasons; During the relevant time, service tax was leviable on the specified activities defined as taxable service defined as, under Section 65(105)(zzr), "Any service provided or to be provided to any person, by the holder of intellectual property in relation to intellectual property service"; intellectual property service was defined, under Section 65(55b), to mean (a) transferring 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;
12ST/386-391/2010 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 Blades Pvt Limited 2019- TIOL-3656-CESTAT-Bangalore (iii) TATA Tele Services Limited 2016- TIOL-2619 and (iv). Larsen and Toubro Limited Manupatra / SC / 0887/2015.
8. Learned senior counsel submits further that CBIC has brought to the notice of the GST Council, the issue of taxability of the economic surplus received by the brand owners, referring to their previous circulars; Finance Ministry informed that the issue has attained finality with the decision of Tribunal in the case of BDA Pvt Ltd affirmed by Supreme Court; it was submitted to the GST Council that the position under GST is not different and the said activity should not be liable to GST also; a draft circular placed before the law committee on 28.01.2020 was approved the and recommended to be placed before the GST Council; draft circular has also discussed the model of payment of Royalty in the case law of BDA Pvt. Limited; Royalty payable by the CBU was also funded by BDA Pvt. Limited out of the economic surplus; even in the instant case (clause 19 of the agreement with McDowell &Company Ltd and Ajanta Bottlers Limited dated 6.08.2004), the consideration payable in terms of this agreement includes the consideration payable under user-ship agreement and licensing agreement.
9. Learned senior counsel submits in addition that since the issue of taxability of amount received from CBUs / TMUs is held not taxable by various judicial forums as discussed above, the other issues of valuation and CENVAT Credit may not be relevant; However, revenue has also filed appeals contesting the valuation aspect, the appellant makes the following submissions.
13ST/386-391/2010 9.1. Submissions on valuation: he submits the consideration for the licensing / user-ship agreements, as agreed upon by the parties is 2% of net sale realization; commissioner on the basis of elaborate findings concluded that the said 2% of NSR shall be the value of taxable service; since the principle issue of taxability of the disputed service has been decided by the Tribunals against the revenue, the question of deciding this aspect separately may not arise; Government of India while explaining the issue before the GST Council in its 39th meeting, relied on the /valuation instruction 332/17/2009-TRU dated 30.10.2009 and clarified that the surplus profit earned by the brand owner being in the nature of business profits falls within the purview of direct tax and 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 exempted goods as defined under Rule 2(d) of CENVAT Credit Rules 2004 and therefore, the provisions of Rule 6(3)(c) is not attracted in the instant case; the assessee can utilize the credit to discharge the tax liability provided without being limited by the ceiling of 20% of the tax due; in terms of Section 2(d) of CENVAT Credit Rules 2004, "Exempted goods" means excisable goods which are exempt from whole of duty of excise leviable thereon and includes goods chargeable to nil rate of duty; in 2011 the definition was amended to say "Exempted goods" means 14 ST/386-391/2010 excisable goods which are exempt from whole of duty of excise leviable thereon and includes goods chargeable to nil rate of duty and goods in respect of which the benefit of exemption under Notification No.01/2011-CE dated 01.03.2011 is availed; this definition is not applicable for the present case since the dispute relates the period prior to 2011; provisions of Section 2(e) defined exempted service means taxable services which are exempt from the whole of service tax leviable thereon and includes services on which no service tax is leviable under Section 66; in view of the decision of CESTAT, since the input services was not used for manufacture of exempt goods or for provision of exempt services the restriction of 20% of the tax payable in terms of Rule 6 of CENVAT credit Rules was not applicable; commissioner also held that service tax paid by them using CENVAT Credit was regular; denial of CENVAT Credit therefore is not legally sustainable.
10. Learned senior counsel submits on the issue of limitation that the demands in respect of M/s. Herbertson Ltd and M/s. United Spirits Limited has been issued within normal period; issue of limitation would be applicable for McDowell and Company Limited; the department was aware that the appellant was getting the goods manufactured from Contract Manufacturing units/TMUS; department had also issued notices to the appellant M/s McDowell &Company during the period 1997 to 2005, holding that amount paid by the CBUs to the appellant in terms of Tie up manufacturing agreements was an additional consideration for the value of food flavours sold by the appellant; CESTAT had allowed the appeal filed by appellant; Revenue had filed appeal before the Honourable SC which had remanded the matter to CESTAT; the issue is presently pending before the Honourable CESTAT in E/20274/2021; 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:
15ST/386-391/2010
(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 extended period of limitation is applicable and whether the penalties are imposable.
13. The appellants enter into agreements for Contract Manufacturing with the third party distilleries (Contract Bottling Units); for this purpose, they enter into (i) Agreement for tie-up manufacture and (ii) Licensing Agreement or (iii) User ship Agreement; under this arrangement, the brand name owner such as the appellant will bear the cost of production; the brand owner directs the contract bottling unit to procure the raw material etc. from the specified sources at the price negotiated by the brand owner; in some cases, the brand owners supplies the spirits; the brand owner may directly supply these goods or reimburse the costs to the CBUs; the brand owners depute their technical staff to supervise and control the manufacturing activity to ensure meeting of specifications; the CBUs are paid bottling charges or retention charges. The liquors so manufactured by the CBUs are sold and the sale proceeds are credited to a joint bank account which is operated by the brand owner only; even in cases where the bank account is in the name of CBU, the account is operated by brand owner personnel; the brand owner pays the CBU all the expensed to be met; the net proceeds represent the brand name owners operating profit. Wherever the CBUs/ tie-up units are required to sell the liquor to other parties i.e. State Controlled Agencies or other licensees, the CBUs sale the same at the market price fixed by the appellant; the CBUs transfer the difference between selling price and ex- distillery price to the appellants; the Department alleges that the appellant are liable to pay service tax on the same.
14. It is the contention of the Department that the appellants have rendered services relating to „Intellectual Property Service‟ as per Section 16 ST/386-391/2010 65(105)(zzr) of Finance Act, 1994; it is the contention of the Department that the appellants, by permitting the Contract Bottling Units to use their brand names and by giving the technical know-how by deputing personnel are rendering Intellectual Property Services. The appellant claims that the Department, has not appreciated the overall schemes of the agreement, going through which it would be clear that no rights have been transferred and the said CBUs cannot exploit the so called intellectual property rights for any commercial benefit; in fact, the appellants 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 militate against the petitioner possession and control of the machinery. For these reasons, we are of the opinion that the transaction does not involve transfer of right to use the machinery in favour of the contractor."
14.1. It was also held by the Apex Court in the case of M/s Panipat Woolen and General Mills Co. Ltd. 1975-SCR-186 that:
"It is well settled that the court in order to construe and agreement has to look into the substance or the essential of it rather than to its form. A party cannot escape the consequence of law merely by describing an agreement in a particular from though the essence and substance may be a different in the transaction."17
ST/386-391/2010
15. In order to understand the general tenure of the agreements entered into by the appellants with the Contract Bottling Units, it will be required to go through the relevant clauses of the agreements.
15.1. In Clause 3 of the Agreement for tie-up manufacture of IMFL products dated 6th August, 2004 between Mc Dowell and Co. Ltd. (earlier name of the appellants) and AGANTA Bottlers and Blenders Pvt. Ltd., it is stated that:
3.....
IMFL products will be manufactured as per the formula prescribed by McD. AJANTA will have full control of its own factory wherein IMFL brands are manufactured. However, McD shall have the right of quality control and can direct samples or batches to be taken for inspection at its absolute discretion. If McD finds that any particular batch or product is not upto the specified requirements, the same shall be rejected. It will be the absolute discretion of McD to decide as to the rejection of any batch or product. The cost for the rejected batch will be borne by AJANTA.
15.2. In Clause 11(d) it is specified that:
payments for IMFL supplied as per the direction of McD, in the State of Jharkhand, will be collected by McD/AJANTA and AJANTA shall be entitled only to the amounts computed under clause 20 (hereinafter appearing) i.e. "agreed retention". McD shall be entitled to the balance amount. This will be so even if payment is received by AJANTA directly, whereupon the excess over agreed retention shall be made over by AJANTA to McD.
15.3. It is also mentioned under Para 20(vii) Agreed Retention: Agreed retention towards investments, overheads, etc. agreed between both parties and reviewed periodically. The above items of cost will be approved in writing by McD. Such approval will 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 18 ST/386-391/2010 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 which is confusingly similar to or unfairly competing with any of the trade marks or other such names of the Proprietor. The license is personal to the User and not assignable and is subject to the condition that no part of the process of manufacture of the Goods shall be carried on by any person........
16. Ongoing through the agreements, a few portions of which are extracted as above, we find that effective control of the production and sale is with the appellants i.e. brand owners and not with the Contract Bottling Units. We find that the learned Counsel for the appellants has rightly submitted that in respect of Contract Manufacturing Arrangement (for IMFL), manufacturing activity falls within the purview of State Excise; the appellant have absolute control over manufacture of IMFL, right from the stage of procurement of raw-material till dispatch; they exercise complete control over quality, packing, labelling, records of production/dispatch/ sales etc. sale proceeds are channelled through bank accounts, controlled and operated appellants; Statutory levies, i.e., State Excise Duty/franchise fee, brand registration fee etc., are paid/ reimbursed by the appellant; CBU retains the EDP including retention amount and balance amount is transferred to the appellant; appellants have absolute control over supply of finished 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.
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17. We find in the facts and circumstances of the case, the brand owner has not transferred any intellectual property relating to the trade name, trade mark, brand name, technical know-how etc. pertaining to the goods manufactured by the Contract Bottling Units; the Contract Bottling Units are in no position to commercially exploit or to avail any financial benefit out of the above; they are paid fixed charges as per the agreements and the surplus whatever accrues to the brand owner appellant. When the transferee is not in a position to use the technical know-how etc., it cannot be said that the Contract Bottling Units have availed any services with respect to intellectual property rights from the brand owner appellants. It is seen that it is the brand owner himself who is using his own brand and technical know- how 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 job workers as IMFL sold by or as per direction of assessee.
Profit/loss on account of manufacturing and sale of IMFL entirely on assessees's account holding property risk and reward of product. Jo worker receiving consideration for undertaking manufacture on job work done basis."
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19. We also find that the above case has been followed by the Tribunal in the case of M/s Redico Khaitan Ltd. 2016-TIOL-1704-CESTAT-DELHI; Skol Breweries Ltd. ST-2014-TIOL-588-CESTAT-MUM and in the case of Pernod Ricard India (P) Ltd. 2020 (1) TMI 427- CESTAT Chandigarh; Jagjith Industries Ltd. VS CCE, 2017-TIOL-1660-CESTAT-CHD and Bacardi India Pvt. Ltd. Vs CST, Delhi 2018-TIOL-2594-CESTAT-DEL. We also find that CBEC vide Draft Circular dated March, 2020 intended to clarify that: in view of the above, it is clarified that in this model, where the CBU/TNU undertakes manufacture of liquor for the brand owner, including the variants discussed above; the BO holds the property in and risks and rewards associated with the product manufactured by the TMU/CBU. TMU/CBU receives consideration for the service of undertaking manufacture for the brand owner. Therefore, surplus retained by BO is not taxable. Even in the service tax regime, it was clarified vide Letter F.No.332/17/2009-TRU dated 30.10.2009 that „economic surplus‟ is not taxable. However, the consideration received by TMU/CBU for undertaking manufacture of liquor for an on behalf of BO, in the form of bottling charges, conversion charges or in any other name or form is taxable.
20. In view of the above, we are of the considered opinion that the Department has not made out any case against the appellants for demand of service tax on Intellectual Property Services. The Revenue has filed appeals contesting the valuation for the purpose of levy of service tax adapted by the appellants. In view of our discussion above, we have concluded that the appellants are not liable to pay service tax therefore the issue of valuation becomes redundant to that extent.
21. Coming to the issue of admissibility of CENVAT credit, the appellants submits that they are not disputing the levy of service tax in respect of brand franchise agreement for manufacture of packaged drinking water and soda; the Commissioner has also held that the appellant is eligible to CENVAT credit on advertising. The appellants submit that majority of the advertisements are for 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 21 ST/386-391/2010 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 therefore, inputs such as bottles, caps, cartons which are found to have been exclusively used by the appellants in the manufacture of IMFL, which is not chargeable to Central Excise duty, the entire CENVAT credit availed by the assessee during the period is irregular. Learned Commissioner further finds that the CENVAT credit availed on services such as Advertisement and Sales Promotion, Repairs and Maintenance, Professional fees, Recruitment Advertisement, Security Services, Auditors‟ Remuneration, Legal and Professional Fees, Insurance and Travel Tickets etc. was not shown to be have any nexus with the output service.
22. We find that there is considerable force in the averments of argument of the learned Commissioner. We find that as per the scheme of the CENVAT credit, the appellants have a responsibility thrust upon them to show the nexus between the inputs/input services to the ultimate output/output services, as the case may be. The appellants are also required to follow the procedure contained in Rule 6 of CENVAT Credit Rules. The appellants did not specify the nexus between the credit availed and the output services provided. During the hearing or in the written submissions no clarification was given, except relying on the interim order of this bench granting stay. We find that the tribunal made only some passing remarks, which in no way can be held to be ratio decidendi. As per the available records, it cannot also be ascertained as to whether the appellants have maintained separate accounts to show the inputs/input services which are used in exempted and 22 ST/386-391/2010 dutiable products. For this purpose, we find that in the interest of justice, the issue requires to go back to the adjudicating authority to verify the claims of the appellants on the issues eligibility of CENVAT credit on inputs/inputs services, the nexus between the input/ input services with the output/output services and the adherence of the appellants to the procedure prescribed under Rule 6 of CENVAT Credit Rules.
23. In view of our discussion and findings as above,
(i). Appeals No. 386, 387 and 388 of 2010 are partly allowed;
(ii). Demand of service tax of Rs.13, 15, 91,471 and penalty of equal amount imposed are set aside;
(iii). As regards the demand of CENVAT credit of Rs.10,17,92,834, the issue is remanded to the original authority for a fresh consideration on the basis of the evidence that may be submitted by the appellants and on the basis of available records; the remand proceedings be completed within 12 weeks of receipt of this order, as may be practicable.
(iv). Appeals No. 389, 390,391 of 2010, filed by the Department, are dismissed.
(Order pronounced in the Open Court on 10/08/2022) (S.K. MOHANTY) JUDICIAL MEMBER (P ANJANI KUMAR) TECHNICAL MEMBER 23