Custom, Excise & Service Tax Tribunal
M/S. Bda Pvt. Ltd vs Commissioner Of Central Excise on 12 June, 2015
IN THE CUSTOMS, EXCISE AND SERVICE TAX
APPELLATE TRIBUNAL, NEW DELHI
PRINCIPAL BENCH, COURT NO. II
Service Tax Appeal No. 636 of 2009
Service Tax Misc Application No. 55738 of 2013
[Arising out of Order-In-Original No. 12/Commr/Mrt- I/ /2009 dated 31.03.2009 passed by Commissioner of Central Excise Meerut ]
For approval and signature:
Honble Mr Ashok Jindal, Member (Judicial)
Hon'ble Mr. R K Singh, Member (Technical)
1
Whether Press Reporters may be allowed to see the Order for publication as per Rule 27 of the CESTAT (Procedure) Rules, 1982?
2
Whether it should be released under Rule 27 of the CESTAT (Procedure) Rules, 1982 for publication in any authoritative report or not?
3
Whether Their Lordships wish to see the fair copy of the Order?
4
Whether Order is to be circulated to the Departmental authorities?
M/s. BDA Pvt. Ltd. Appellants
Vs.
Commissioner of Central Excise Respondent
Meerut Appearance:
Shri L P Asthana with Shri Vishal Agarwal, Advocate for the Appellants
Ms. Suchitra Sharma, AR for the Respondent
CORAM:
Hon'ble Shri Ashok Jindal, Member (Judicial)
Hon'ble Mr. R K Singh, Member (Technical)
Date of Hearing : 29. 5.2015
Date of decision : 12.6 2015
ORDER NO. FO / 51870 /2015-Cus(Br)
Per Ashok Jindal :
The appellant is in appeal against the impugned order confirming the demand of Service Tax under the category of Intellectual Property service along with interest and penalties under section 77 and 78 of the finance Act, 1994.
2. The brief facts of the case are that the appellant is owner of brand name Officers Choice. They are engaged in manufacture and sale of Indian Made Foreign Liquor (IMFL). As the appellant was not having manufacturing facility to produce IMFL in the State of Uttar Pradesh , they entered into agreement dated 19.8.2000 with M/s. Pilkhani Distilillary and Chemical Works (hereinafter referred to as M/s.Pilkhani). The Revenue is of the view that M/s. Pilkhani is using the brand name and technical knowhow of the appellant and paying consideration in terms of royalty for use of brand name and technical knowhow of the brand owner i.e. the appellant, but the appellant is not paying service tax thereon on the belief that the permission to use the brand name by the appellant is not a taxable service under the category of Intellectual Property Service under Section 65(65A) of the Finance Act, 1994. Therefore, the show cause notice dated 12.2.2008 was issued by invoking extended period of limitation for the period 10.9.04 to 31.3.06 to demand Service Tax under the category of Intellectual Property service. The said show cause notice was adjudicated. The demand of service tax was confirmed against the appellant along with interest and penalties under section 77 and 78 of the Finance Act, were imposed. Aggrieved from the said order, the appellant is before us.
3. Shri L P Asthana, learned advocate along with Shri Vishal Agarwal, Advocate appeared before us and submits that appellant was the brand owner of IMFL and marketing also. 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-588-CESTAT-Mum].
4. They further, submitted that the Commissioner of Central Excise, Meerut have no jurisdiction to issue show cause notice to the appellant as the appellant is not having any registered office in its jurisdiction as held by the Tribunal in the case of CCE, BBSR vs. Ores India (P) Ltd. [2008 (12) STR 513 (Tri-Kolkatta)]. They further submit that show cause notice have been issued by invoking the extended period of limitation. It is therefore stated that demand of service tax is barred by limitation as the issue whether the appellant is liable to pay service tax or not or under which category was not clarified and having no clarification thereof, same has been clarified by CBEC through a circular dated 27.10.08. Therefore, the demands are hit by limitation.
5. On the other hand, Shri Amresh Jain and Ms. Suchitra Sharma, ARs opposed the contention of learned Counsels and submit that on merits the appellants are receiving royalty as per the terms of agreement clause no. 22 and they are having their office in the jurisdiction of Meerut Commissionerate. Moreover, the applicant has suppressed the fact that they are receiving royalty from M/s. Pilkhani. In these circumstances, they are liable to pay Service Tax. Shri Jain also drew our attention to the CBEC circular dated 27.10.08 and submits that the appellant has given their license for use / have taken their brand name to M/s. Pilkhani, therefore the learned Commissioner has correctly confirmed the demand of Service Tax under the category of Intellectual Property services as per clause 2 of CBEC Circular dated 27.10.08.
6. Heard the parties. Considered the submissions.
7. In this case, we find that the appellant has entered into two agreements dated 19.8.2000, one for manufacture and sale and another for usership with M/s. Pilkhani. For proper appropriation of facts of the case. The terms of agreement are reproduced as under:-
Agreement for Manufacture and Sale.
2. The sale of IMFL under this agreement shall be by Pilkhani through BDA and shall come into force with effect from 19th August,2000 and shall subject to the provisions for earlier determination /termination herein contained continue initially for a period of four years. After expiration of the initial terms of four year this agreement may be renewed for such further period upon such terms and conditions as may be mutually 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 BDAs 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 prior to dispatch.
(b) If the quality of the spirit manufactured / procured by Pilkhani is not found acceptable by BDAs Representatives, Pilkhani undertakes not to use such spirit for the manufacture of IMFL brands for them. Pilkhani undertakes to use the spirit of quality only as per the specifications and tolerances given by BDA and that the opinion of BDAs Representative will be binding in so far as the quality of spirit is concerned.
(c) If the quality of the finished product manufactured by Pilkhani is not found acceptable or not conforming to quality requirements by BDAs representatives then and in that event, BDA shall have the right to reject the same.
(d) In case of any reason, whatsoever, the Representatives of BDA are not allowed to enter the distillery or perform the duties as specified above. BDA has the absolute authority to terminate this Agreement without any notice and Pilkhani will immediately cease to produce all IMFL brands authorized for production under this Agreement.
(e) Notwithstanding anything contained herein, the risk property or interest in possession of and title or ownership to spirit manufactured by Pilkhani always remain with Pilkhani.
7. Pilkhani will provide free of charge suitable office accommodation to the satisfaction of BDA for the Representatives of BDA to be posted at the said distillery.
10. Pilkhani shall obtain at its cost such licences as may be necessary from time to time for the manufacture, blending bottling, storage, sale and delivery of IMFL products. However, in case of sale in Utter Pradesh bonded warehouse FL-2 license is required, the License Fee etc. will be borne by BDA Ltd.
11. The risk, property of interest in possession of land title or ownership to the IMFL shall pass from Pilkhani to the buyers only upon delivery of IMFL by Pilkhani to the common carrier from Pilkhani or from its Godown /Depot under operation, Pilkhani will not be responsible for any transit losses due to accident or any other reason the amount paid along with incidental expenses shall be the liability of the buyer itself.
However, the risk, property or interest in possession of and title or ownership to the IMFL manufactured by Pilkhani shall remain with Pilkhani when such IMFL is delivered to the common carrier for dispatches to its own depots located in and outside the State of Uttar Pradesh by way of stock 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 Pilkhani the user of the trade mark owned by it.
16. The trade marks brand names and the get up in which the IMFL products will be sold, supplied and delivered by Pilkhani to the buyers, shall be the sole property of BDA (which Pilkhani hereby acknowledges), and Pilkhani neither had nor has any right, title, or interest therein and shall not at any time claim any right whatsoever, to the ownership and / or the use of the labels, brand name, trade marks and / or get up.
17. Pilkhani hereby agrees that it will keep a minimum stock of 15 days IMFL products requirement of BDA at any point of time. BDA shall endeavour to send to Pilkhani sufficient permit / passes in time to ensure that the stock level does not exceed this limit.
18. The prices at which Pilkhani will sell and deliver IMFL products under this agreement are detailed in a separate writing signed by the parties on the date of this agreement for each size and each brand. Such separate writing shall be and shall always be deemed to be part of this Agreement. These prices are all inclusive ex-factory and include storage and other expenses including the cost of packing materials such as bottles, labels, seals, mono-cartone, corrugated boxes and wire netting expenses etc., incurred by Pilkhani including wastages thereon as per annexure. The prices are however, exclusive of sales tax, excise duty, bottling fees, export fees, octroi, transit insurance, excise escort charges and any other taxes, duties or fees as may be leviable at the relevant time including any additional levies of any nature whatsoever.
19. The price per case of ENA based and RS based brands of IMFL have been agreed to and are confirmed as provided in clause 18 hereof by a separate writing as on the date of this Agreement. These prices are subject to change from time to time as may be mutually agreed upon and will be evidenced from time to time by separate similar writings only relating to the change of prices between the parties. Such separate writing or writings relating to change of prices will without anything more to be done by and between the parties be and shall always be deemed to be a part of this agreement or a modification of this agreement from the date of such writing and this agreement shall stand modified from time to time to the extent of such writing or writings relating to change of prices only.
The cost element 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 Indentors at the rate approved by BDA from time to time after deducting any discounts or rebates authorized by BDA, BDA will be responsible to and shall arrange for the collection of sale proceeds and declaration forms required for Sales Tax.
The payment shall be made by the Direct indentors by way of cheque or demand draft drawn in the name of Pilkhani. Pilkhani after retaining the value of each product at the rate agreed from time to time in accordance with clauses 18 and 19 of this agreement by separate writing and the amounts representing the statutory dues such as Sales Tax, Excise duties, fees etc. will pay to BDA the balance amount (which represents royalty) due and payable to BDA within seven days from money being received in their accounts. However, BDA will not withdraw any amount as royalty or otherwise till the investment in the working capital of the Pilkhani is completely repaid.
(b) Pilkhani will invest upto the maximum of Rs.50.00 lacs towards working capital to carry out bottling arrangements. Any investment over and above this amount will have to be invested by BDA. The amount invested by Pilkhani will carry additional interest of 24% calculated on daily average basis. This facility of finance will be reviewed from time to time at the discretion of Pilkhani. Usership Agreement A. The Proprietors have been carrying on business as manufacturers of and dealers in all kinds of wines, spirits and liquor as also the goods set out in the Schedule A (hereinafter called the said trade mark).
B. The users have entered into a Manufacturing Agreement with the Proprietors dated 19th August, 2000 (hereinafter called the Manufacturing Agreement) whereunder the users will be undertaking the manufacture of contract products at the distillery as per the specification to be provided by the proprietors will be undertaking the sale of the contract product so manufactured to the proprietors or as per the directions of the proprietors.
C. In terms of the Manufacturing Agreement including for the consideration mentioned herein, the Proprietors have agreed to grant to the users and users are desirous of having a License to the said trade marks for the contract products upon the terms hereinafter contained and not otherwise.
5. Royalty is payable by the Users to the Proprietors for the permitted use of the said trade marks in the mode and manner 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 release of the cost of the job work expenses incurred by M/s. Pilkhani. From these facts and from the tenor of the agreement, it is clear that the appellants are brand owners and engaged in the activity of manufacture of alcoholic beverage. The cost of raw material and other expenses were reimbursed to M/s. Pilkhani. State Levy such as State Excise duty and other tax were reimbursed to M/s. Pilkhani and alcoholic beverages were sold as per the direction of the appellant. Therefore on analyzing the agreements between the appellant and M/s. Pilkani, we observe as under :-
M/s. Pilkhani is receiving consideration for job work charges indicating manufacturing activity. Merely the clause of royalty mentioned in the agreement does not mean that the appellant has given the right to use their brand name to M/s. Pilkhani for their use.
Same view has been taken by the Honble Apex Court in the case of Panipat Woollen and General Mills Co. Ltd. [1976 3 SCR 186] wherein the Honble Apex Court has held as under:-
It is well settled that the Court in order to construe an agreement has to look to the substance or the essence of it rather than to its form. A party cannot escape the consequences of law merely by describing an agreement in a particular form though in essence and in substance it may be a different transaction. Further, the Larger Bench of this Tribunal in the case of Pagariya Auto Center vs. CCE, Aurangabad [2014 (33) STR 506 (LB)] has also observed as under :-
20.?On a consideration of the apparent conflict of opinion in the decisions mentioned in the order of reference and the other decisions which were cited at bar, it is clear that no uniform principle emerges as would guide determination of whether a particular transaction involving an interface between an automobile, dealer and bank or financial institution would per se amount to BAS. The identification of the transaction and its appropriate classification as the taxable BAS or otherwise must clearly depend upon a careful analysis of the relevant transactional documents. Only such scrutiny and analysis would ensure rational classification of the transaction.
Further, we find that the appellant has relied on CBEC Circular dated 27.10.2008 wherein the issue has been examined. For better appreciation of the issue, the said circular is reproduced herein as under:-
1.?Brief Background Issues 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, which are as follows.
2.?The Brand Licensing Arrangement 2.1 Many alcoholic beverages bear brand names. The Brand Owners (herein after called the BO), which includes Indian subsidiaries of International brand owners, hold the intellectual property rights over such brand names. The Licences (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 licencee/manufacturer. The tax is chargeable on the gross amount charged by the BO from the licencee/manufacturer.
3.?Contract Manufacturing Arrangement 3.1?Under such arrangement the BO gets alcoholic beverages manufactured by the licencee/manufacturer, the latter holding the required State Licences for manufacture of the alcoholic beverages. In trade, such licencees/ manufacturers are called the Contract Bottling Units or CBUs. The cost of raw materials (and in some cases, even capital goods) and other expenses are either paid by the BO or reimbursed by the BO. Statutory levies (i.e. State Excise Duty) are also reimbursed to the CBU by the BO. The alcoholic beverages are sold by or as per the directions of the BO and profit or loss on account of manufacturing and sale of alcoholic beverages is entirely on account of BO, who thus holds the property, risk and reward of the products. The CBU receives consideration (i.e. job charges) for undertaking the manufacturing activity on job work basis. There is no doubt that under such an arrangement, CBU is a service provider providing services to BO. A doubt has arisen, whether or not the CBU provides a taxable service namely the Business Auxiliary Service (BAS) to BO. This taxable service includes any service provided or to be provided in relation to production or processing of goods for, or on behalf of, the client. This taxable service however, by 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 emergence of excisable goods, which as per Section 2(d) are the goods specified in the First and the Second schedule of the Central Excise Tariff Act, 1985 as being subjected to duty of excise.
Therefore, manufacture and excisable goods are two independent concepts and that it is not necessary that a process amounting to manufacture within the meaning of Section 2(f) should always result in emergence of an excisable goods and vice versa. Whether a process would amount to manufacture within the meaning of Section 2(f) has to be seen independently, based on the criteria evolved through various judgments of the Apex Court. There may be a case, when a process may amount to manufacture under Section 2(f) but it may not result in emergence of an excisable product. If that be so, then the exclusion clause under BAS, which refers only to the activity amounting to manufacture within the meaning of Section 2(f), would still apply to such processes, whether or not the resultant product are excisable goods. Such is the case of production of alcoholic beverages, which qualifies to be a process amounting to manufacture within the meaning of Section 2(f), when read with the relevant judicial pronouncements, because a new product, with a distinct name, character or use; and capable of being marketable, emerges; and
(b) In the instant case the exclusion provision under the definition of Business Auxiliary Service (under the Finance Act, 1994) makes a reference to a definition of the word manufacture) figuring under another Act (i.e. The Central Excise Act, 1944). It is a settled law that when a definition from an Act is transposed into another Act, it is as if the said definition is physically written into the borrowing Act without any reference to the context of such definition in the Act from which it is being borrowed. It is the words of that definition, which is imported into the borrowing Act and not the scope of the first Act and the context in which such definition is used in the first Act. Admittedly the scope of the two Acts would be distinct and if the definition is borrowed from the first Act into the second Act having different scope, the same would get disturbed/distorted if the context and scope of the earlier Act is also imported. Thus just because Central Excise Act does not extend to the manufacture or production of alcoholic beverages meant for human consumption, it cannot be said that the term manufacture used in Business Auxiliary Service would also not cover the process of making the said product, namely alcoholic beverages.
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 levy or taxes were also reimbursed to M/s. Pilkhani by the appellant. The IMFL was sold by or as per the direction of the appellant on profit /loss on account of the manufacturing and sale of IMFL is entirely 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.
9. The arrangement was further examined by CBEC and by TRU letter dated 30.10.2009 again it has been clarified as under -
2. Under section 67 of the Finance Act, 1994, service tax is chargeable on the gross amount charged by the service provider for providing taxable services. As per CIABC the gross value of sales, as per invoices, includes the following elements:-
1) Bottling /job charges paid to CBU
2) Distribution costs including freight, transit insurance etc. paid to CBU
3) Other reimbursable paid to the CBU
4) Cost of raw material paid to the CBU
5) Cost of packaging materials paid to the CBU
6) State excise duty and VAT paid to State Government
7) Surplus/ profit retained by BO It was their plea that if the entire amount charged by CBU is subject to service tax, it would amount to charging tax on goods. The CIABC, therefore, requested that the service tax should be charged on the amount representing the charges for service alone. Accepting their plea, Notification No. 39/2009-ST dated 23.9.2009 was issued wherein exemption from service tax has been provided on the value which represents the value of inputs i.e. raw materials and packaging materials used in the manufacture of such alcoholic beverages.
3. The CIABC has now sought clarifications on the tax base on which the service tax would be chargeable after allowing the deduction provided in the notification. In short, they want to know as to how many of the above 7 elements would be includible in the value for the purpose of charging service tax.
4. For removal of doubts and with a view to avoid disputes on valuation, it is 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. raw materials and packing materials are concerned, one of the conditions of exemption Notification No. 39/2009-S.T. is that there should be documentary proof specifically indicating the value of these inputs. Therefore, service tax on the value of raw materials and packaging materials would be exempt only when such charges are specifically mentioned in the invoice raised/documents maintained by the CBU.
(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 observed as under:
9. The terms of the Agreement, CBUs to manufacture the products for and on behalf of the appellant at the plant of CBU using the appelalnts equipment . The Agreement clearly states that the CBU has no right to use the intellectual property of the appellant and there is no transfer of any IPR to the CBU from the appellant. The CBU has no claim whatsoever on the rights of the appellant. The nature of transaction between the appellant and CBU indicates that the appellant to use the brand on his own account and there is no representational right given to the bottling unit for the brand name. The commercial interest of the bottling unit is to earn the consideration for bottling or manufacturing the alcoholic beverages. The appellant uses the bottling units for producing the said beverages in their brand names for sale in profit. The said activity has been dealt with by the CBEC in their Circular No. 332/17/09 TRU dated 30.10.2009.
10. After going through the Boards Circular dated 30.10.2009 deals with the situation in this matter and the activity exactly undertaken by the appellant. In the light of the said Circular it was held that the brand owner / appellants are not required to pay service tax as the surplus /profit earned by the CBU being in the nature of profit. Therefore, as clarified by the CBEC through two Circulars, the appellants are not liable to pay service tax.
12. This issue further came up before this tribunal in the case of Skol Breweries Ltd. (supra) wherein this tribunal has observed as under:
6.?After taking through the agreements, the appellant argues that FIPL is only a Contract Bottling Unit (CBU), manufacturing and supplying beer as per specifications and formulation including freight and escort to the appellant. Further, the sale is also being made to the appellant or to its Indenters as per the direction of the appellant. Thus, the appellant has neither provided any Franchise Service nor any Intellectual Property Right Service to FIPL and thus, the impugned demand of tax and penalty are fit to be set aside.
6.1?The appellant also draws our attention to Circular F. No. 249/1/2006-CX.4, dated 27-10-2008 which was issued in respect of production of alcoholic beverages on job-work basis and classification of Service Tax liability. Clause 2.1 of the Circular provided that the Brand Owners (BO) of the Alcoholic 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 beverages. In trade, such licensees/manufacturers arc called the Contract Bottling Units or CBUs. The cost of raw materials (and in some cases, even capital goods) and other expenses are either paid by the BO or reimbursed by the BO. Statutory levies (i.e. State Excise Duty) are also reimbursed to the CBU by the BO. The alcoholic beverages are sold by or as per the directions of the BO and profit or loss on account of manufacturing and sale of alcoholic beverages is entirely on account of BO, who thus holds the property, risk and reward of the products. The CBU receives consideration (i.e. job charges) for undertaking the manufacturing activity on job work basis. There is no doubt that under such an arrangement, CBU is a service provider providing services to BO. A doubt has arisen, whether or not the CBU provides a taxable service namely the Business Auxiliary Service (BAS) to BO. This taxable service includes any service provided or to be provided in relation to production or processing of goods for, or on behalf of, the client. This taxable service however, by 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.
6.3?On examining the scope of manufacture in para 3.3 of the Circular, it is revealed 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.
6.4?Further, the appellant drew our attention to notification/clarification issued by CBE&C vide F. No. 332/17/2009-TRU, dated 30-10-2009 on value of taxable services under the category of Business Auxiliary Services for manufacture of liquor on job-work basis. It is mentioned in the Circular that Service Tax has been imposed by Finance (No. 2) Act, 2009 under Business Auxiliary Services to include the manufacture of alcoholic beverages on job-work basis. In this connection, in the earlier Notification No. 39/2009-S.T., dated 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. raw materials and packing materials are concerned, one of the conditions of exemption Notification No. 39/2009-S.T. is that there should be documentary proof specifically indicating the value of these inputs. Therefore, service tax on the value of raw materials and packaging materials would be exempt only when such charges are specifically mentioned in the invoice raised/documents maintained by the CBU.
(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.
6.6?Thus, the appellant claims that in view of the amendment brought in 2009 w.e.f. 1-9-2009, the bringing into tax net, the activity of job-work provided by the Bottling Unit (service provider) to the service receiver - Brand Owners, there is no exigibility of Service Tax in the appellants case prior to 1-9-2009. Further, reliance is placed on the ruling of Coordinate Bench of this Tribunal in the case of Diageo India Pvt. Ltd. v. Commissioner of Central Excise, Thane-II - 2013-TIOL-790-CESTAT- MUM = 2013 (32) S.T.R. 254 (Tri.-Bom.) where in a similar arrangement between the parties, it was held that Brand Owner is not required to pay any Service Tax under the category of Franchise Service taking the notice of clarification vide Boards Circular dated 30-10-2009.
6.7?The appellant also drew our attention to the distinction between the user agreement, licensed user agreement, registered user agreement and a manufacturing agreement. As per the book of P. Narayanan, Sixth Edition - Ordinarily in a user agreement, licensed user agreement or a registered user agreement, the licensee gets the right to sell the goods manufactured under the agreement on its own. In a manufacturing agreement the owner of a trade mark gets the goods manufactured by a manufacturer on the basis of something like a job work and for the specific purpose authorizes the manufacturer to apply the mark on the goods, on condition that the whole of the goods so manufactured bearing the trade mark should be sold to the owner 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 attracted.
7.?The learned Addl. Commissioner (AR) appearing for the Revenue supports the Order-in-Original and the appellate order. Further, referring to the various clauses of the contract particular clause 2.1 and 3.2 where it is provided that local license fee/tax to be incurred under the agreement shall be borne by FIPL. Further, SKOL (appellant) shall not bear the cost of Annual Brewery Licence Fee. Thus, it is amply clear that essential element of contract of CBU is not satisfied. Further reference is made to clause 2.7 of the agreement which provides that FIPL should be solely responsible for manufacturing appropriate quality standards of Skol beer and packaging as per applicable law. In the event of any claims or complaints being made by any third party in relation to the quality of Skol Beer or packaging to Skol Beer manufactured and bottled by FIPL, FIPL, at its cost, shall arrange to collect such stocks and drain the same in the presence of Skol representative. In any event, FIPL shall indemnify Skol against all claims, proceedings, losses, damages, charges, expenses etc., if any, which may be made against or suffered by Skol with respect to the Skol Beer manufactured by FIPL. Further, FIPL shall also be liable to bear all costs, claims or losses arising on account of any inordinate delay or loss in production or deterioration in the quality of the Skol Beer manufactured by FIPL. Further, the appellant is entitled to collect an amount of Rs. 27/- per case of beer bottle out of the sale proceeds collected by FIPL. Thus, the risk of profit/losses is borne by FIPL. It is not a pure bottling arrangement between parties and thus, Service Tax is attracted as Franchise Service and/or Intellectual Property Right Service.
8.?Having considered the rival submissions, we find that 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. 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 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 category of Intellectual Property service. Therefore on merits, we hold that appellant are not required to pay Service Tax under the category of Intellectual Property Right service.
15. As on merits we held that appellant is not liable to pay service tax under the category of IPRS and we also examined that the show cause notice has been issued to the appellant by invoking extended period of limitation as there is an issue whether the appellant is liable to pay service tax during the impugned period was in dispute and same has been clarified by CBEC Circular dated 27.10.2008 and Ministry of Finance letter dated 30.10.2009. In these circumstances, we hold that the extended period of limitation is also not invokable in the present case. With these observations, we hold that appellant succeeds on merit as well as on limitation. Therefore, we are not deciding the issue of jurisdiction of the adjudicating authority as contested by the appellant.
16. With these terms, impugned order is set aside. Appeal is allowed with consequential relief, if any.
(Pronounced in the open court on 12.6.2015 ) ( Ashok Jindal ) Member(Judicial) ( R K Singh ) Member(Judicial) ss 32