Custom, Excise & Service Tax Tribunal
M/S Radico Khaitan Ltd vs Cce, Delhi on 21 February, 2011
CUSTOMS EXCISE & SERVICE TAX APPELLATE TRIBUNAL, NEW DELHI Service Tax Appeal No. S/932/10 in Appeal No. ST/554/10 (Arising out of order in original No.03-ST/PKJ/CCE/ADJN/2010 dated 20.01.10 passed by the Commissioner of Central Excise (Adjn.), Delhi) M/s Radico Khaitan Ltd. Appellants Vs CCE, Delhi Respondent
Appeared for the Appellant: A.R. Madhav Rao, Advocate
Appeared for the Respondent: Shri Sumit Kumar, JDR
Coram:
Honble Shri Ashok Jindal ,Member (Judicial) Honble Shri Mathew John, Member (Technical
Date of Hearing: 21.02.2011
Date of Decision :.
ORDER NO.
Per Ashok Jindal:
Brief facts of the case are that the Appellant (hereinafter referred to as RKL) are engaged in manufacturing and marketing of several brands of Indian Made Foreign Liquor (IMFL in short). They are also providing technical know how and marketing/promotional services relating to IMFL brands owned by them to several independent manufacturers.
2. M/s Whytehall India Ltd., formerly known as M/s Whyte & Mackay (India) Ltd. (hereinafter referred as WIL) having its registered office at 227, Okhla Industrial Estate, New Delhi was also engaged in manufacturing and marketing of several brands of IMFL. Prior to 1.4.2004, 48% equity in WIL was held by RKL. With effect from 1.4.2004, the balance equity shares in WIL were acquired by RKL and WIL became wholly owned subsidiary of RKL. WIL was finally merged with RKL with all its assets and liabilities, as specified in the scheme of amalgamation duly approved by the Honble Delhi High Court vide order dt. 10.3.2005. Prior to merger with RKL, apart from their own manufacturing units, WIL was providing technical know how and marketing / promotional services for IMFL brands owned by WIL to three independent manufacturers having requisite manufacturing facilities and licences/permissions etc.
3. An intelligence was received in the Directorate General of Central Excise Intelligence (Hqrs) New Delhi which indicated that WIL and RKL were providing services classifiable under the category of Business Auxiliary Services to independent manufacturers of alcoholic beverages and IMFL and were not paying any service tax on the consideration received for these services. Investigations were, accordingly, initiated by DGCEI.
4. Investigations conducted by DGCEI revealed that RKL had entered into written agreements with 38 independent distillers namely M/s Rhizome Distilleries Pvt. Ltd. Hydrabad (RDPL), M/s Alwar Malt and Agro Foods Manufacturers Co. Ltd. Alwar (AMAF) and M/s NV Distilleries & Breweries (P) Ltd. (NVD) for providing them Technical Assistance, Quality Control, assistance in procurement of raw material/packing material and marketing services in respect of goods manufactured by these distillers being the Trademarks owned by RKL and WIL as the case may be. These 41 (38+3) distillers were engaged inter alia in the blending and bottling of IMFL at their distilleries. The distillers were the owners of their respective bottling units, together with all plant, machinery, equipment and ancillaries installed there at. They had all the facilities and capacity to manufacture IMFL including blending, bottling and storage facilities, manpower and other infrastructure necessary for the manufacture of IMFL to meet the requirements and specification of various brands. They held such licenses, permits and permissions necessary or required under the Act, rules, otifications and orders as may be applicable for the time being in force in respective state (s) for the manufacture, storage and sale of IMFL.
5. These 41 distillers (38 pertaining to RKL and 3 pertaining to WIL) had entered into agreements with RKL and WIL, as the case may be, for manufacturing RKL and WIL owned brands of IMFL as per manufacturing proceedures and specifications laid down by RKL and WIL respectively. As per the respective agreements, RKL & WIL used to identify suppliers of raw material and packing material to be purchased; assisted in quality control and blending operations; managed the brand and procure sale orders for IMFL manufactured by the distillers under the terms of respective agreements. The agreements did not appeared to have created any partnership, agency or joint venture relationship between distillers and RKL or WIL, as the case may be, and only envisaged that RKL or WIL would provide certain specified services to the distillers and shall be paid for it. Salient features of these agreements entered between RKL & independent Distillers were similar.
6. On the basis of several clauses of agreement it was found that GDPL being the actual manufacturer and owner of the goods produced under the agreement and under State Excise Laws. He is the recipient of services provided by RKL like procurement of raw material/packing material on behalf of GDPL, permitting use of their brand name, promoting the product, providing marketing services, procurement of orders for supply of finished goods and collection of sale proceeds. For these services RKL was allowed to retain a specified part of sale proceeds collected by it on behalf of GDPL as provided for in the agreement dated 12.04.2004 between GDPL and RKL. Therefore it was alleged that -
(a) GDPL had the manufacturing facility, requisite manpower, licenses/permits etc. for manufacturing IMFL.
(b) GDPL purchased entire raw material and packing material for manufacturing the finished goods as per the advice of RKL.
(c) All these purchases were booked in their own books of account and they were the owner of these materials. Goods bore the brand names of RKL for which GDPL has the requisite permission from RKL.
(d) State Excise duties and other state levies were to be paid by GDPL on the finished goods for clearance from their factory.
(e) Invoices were issued by GDPL favouring the actual buyers directly.
(f) RKL provided their brand names as well as technical know how.
(g) RKL assisted in procurement of raw material and packing material.
(h) RKL promoted the brands in the market which enhanced sale of the products manufactured by GDPL.
(i) RKL procured orders for supplying the goods.
7. Therefore, it was held that GDPL are the manufacturer and owner of the goods and RKL are the provider of services to GDPL. The services provided by RKL to GDPL relating to permitting the use of trade marks/brand names etc. were covered under IPR services and rest of the services were covered under Business Auxiliary Services as per provisions of Section 65 A (2) (b) of the Finance Act, 1994. Therefore, the services provided for RKL to GDPL were classified as Business Auxiliary Services and the demands were confirmed as per show-cause notice along with interest and equivalent amount of penalty. Aggrieved by the said order, the appellants are before us.
8. After hearing both the sides in detail we find that the issue involved in this case is that whether RKL is providing any service to CBU as per the terms and conditions are not under the category of business auxiliary service. To deal with the issue we have to go through the agreement between the parties and after going through one of the agreement produced by the learned Advocate between RKL and Gemini Distilleries (Goa) Pvt. Ltd. vide agreement dated 12.04.2004. An examination of one such agreement dated 12.4.2004 between M/s Gemini Distilleries (Goa) Pvt. Ltd. Bangalore (GDPL) and RKL revealed the arrangement between the independent distillers and RKL. Highlights of the same are reproduced below for better appreciation of the facts:-
4. OBLIGATIONS AND WARRANTIES OF RKL RKL shall, during the currency of this Agreement:
a) Provide the best manufacturing practices with regard to manufacture and bottling of RKL brands and products.
b) Assist in the procurement of quality raw materials and packing material required for the manufacture and bottling of RKL Brands and Products.
c) Ensure that the Trade Marks of RKL are affixed and appended on the RKL Brands and Products manufactured under this Agreement.
d) To assist in procuring orders for RKL Brands and Products manufactured under the Agreement.
e) Provide assistance and guidance with regard to quality control methods and establish quality control procedures with respect to RKL Brands and Products; and
f) Arrange for working capital finance whenever required for manufacture of RKL BRANDS AND PRODUCTS and ensure that the manufacture schedule of such products are maintained in accordance with the terms of this Agreement.
g) Assist in marketing of the RKL Brands and Products that are manufactured by GDPL. (Sub-clause (g) was later amended to read as Marketing or assisting the RKL Brands and Products that are manufactured by GDPL)
h) Procure all permits relating to export of products.
i) Indemnify GDPL against all action, claims. Liability etc., which may arise against or be suffered by GDPL in respect of dispatches made on ions of RKL.
Clause 5. OBLIGATIONS AND WARRANTIES OF GDPL GDPL shall, during the currency of this agreement:-
a) Be responsible for obtaining the necessary permits and licences as applicable under the excise laws as amended from time to time.
b) Abide by all laws, rules and regulations in force at any point of time and shall indemnify RKL for all losses or damages arising out of any non-compliances thereof.
Clause 8. EXCISE LICENSE
a) that GDPL shall, at its own cost and expenses obtain all Excise and required trade licences and permissions as may be necessary for the production/storage of RS/ENA and also for the MANUFACTURE, blending and bottling of RKL Brands and Products and shall also renew and keep valid all such licenses at its own cost from time to time. Further, GDPL shall also be responsible for the payment of annual license fees as may be levied or imposed from time to time by the Government under the relevant Excise Rules for manufacture of RS/ENA and/or IMFL.
b) That GDPL shall be responsible for obtaining excise permission and approvals for registration of brand names, labels of RKL from excise authorities from time to time.
Clause 9. PURCHASE OF MATERIAL
a) For thee manufacture of RL brands and products, GDPL shall purchase Grain ENA, Molasses ENA, Malt spirit..
b) GDPL shall also purchase, procure, obtain at its own cost, all consumables, blending materials and packing material.. for RKL brands and products
c) GDPL shall ensure prompt settlement/payments of suppliers who have supplied materials like consumables, blending material, packing materials for the bottling of RKL brands and products on due dates.
Clause 16. DESPATCHES
a) GDPL shall dispatch from time to time RKL brands and products manufactured at the bottling unit to wholesalers/licencees or CSD canteens in Goa and outside Goa as specified by RKL and only on specific instructions of RKL.
Clause 21. COSTS TO BE BORNE BY PARTIES
b) Costs to be borne by GDPL
1. Cost of DMW used for blending
2. All statutory levies/costs relating to permits, licences, permission.
3. Cost of consumables, manufacturing material, packing material, etc.
4. Cost of Labour, Power, Raw Water, Incidental expenses and all other expenses incidental / ancillary for manufacturing the products under the agreement. Cost of maintaining proper books of accounts, MIS and reconciliation.
Clause 22. RECORDS OF ACCOUNTS, STATUTORY RECORDS & MIS-
(i) GDPL shall book sales and expenses as per normally accepted accounting practices and as may be advised by RKL from time to time.
(ii) Keep true and accurate records of all information required to be kept under any statute for RKL operations separately and necessary for the computation of service charges payable to RKL at its own cost.
Clause 23. EXCISE VERIFICATION CERTIFICATE (EVCSJ AND CFORMS CST) GDPL undertakes to submit the statutory Excise verification certificates (if applicable) and C-forms to respective suppliers within stipulated time and period for all spirits/special spirits and packaging materials, etc. purchased for RKL Brands and Products:
a) (i) Statuory exise verification certificates within 90 days or such period stipulated under law.
(ii) Sales tax declaration forms as may be necessary under law within 90 days or such stipulated period.
(iii) Any penalty imposed by the competent authorities on or any legal expenses incurred by RKL on account of delay/non submission of the certificates and forms described in (i) and (ii) above shall be to the account of GDPL.
9. The applicants are also relying on some of the Clauses of the Agreement that -
* Article 11 at page 832, provides that RKL shall depute necessary commercial and technical personnel at the bottling unit for the duration of the Agreement who shall carry out and responsible for approval of quality of spirit received, stored or used for blending; supervision of blending operations; approval of all qualify of blending and packaging materials; approval of the quality of blends and packaging of IMFL; providing standards of finished products; coordination of manufacturing process and supplies to authorized parties and any other functions, which need to be carried out in the blending operations of IMFL manufactured at bottling unit. In this regard it may be noted that the key executive who controls the blend quality is blender and is on the pay roll of RKL The role of the blender is to ensure quality output, maintain the recipe and quality guidelines issued from head office of RKL from time to time. Sample copies of check sheets maintained by the quality control department are at pages 373 to 378.
* Article 18 at page 834 - RKL provides working capital finances to CBU, and all lien is in favour of RKL. GDPL cannot create any lien on the raw materials or the finished goods etc. The bank account is operated by two RKL authorised representative.
* Article 19 at page 835 - as regards the opening of the bank account where the bank account is showing the name GDPL A/c Radico Khaitan Ltd. and the cheques are deposited in this account. The working capital is secured by RKL by way of various stocks of finished goods as also inputs etc. and GDPL cannot create any lien on these stocks.
* Article 9(d)(ii) at page 831 provides that RKL has to issue an undertaking that it shall settle all outstanding purchases made for RKL products.
* Article 9(e) at page 831, it is relevant that if any input materials become unusable at the instance of RKL, they will be returned to RKL. So also for IMFL manufactured at the instance of RKL or any inputs or packaging materials remaining unutilized for more than two years, the cost of destruction and reprocessing of stocks has to be borne by RKL * Article 20 pertains to distributable surplus which is to be read along with the Third Schedule at page 845. The Third Schedule at page 845 refers to the distributable surplus to be apportioned between GDPL and RKL @ 16% and 84% respectively. By the amendment carried out on 1.6.2004 relevant at page 847 and 848 GDPL gets Rs.45/- per case and the raw materials cost and taxes. Entire surplus thereafter is of RKL who thus undertakes the risk in the venture and liable for its own losses.
* Thus, from Third Schedule at pages 848 and 849 it can be seen that GDPL would be entitled to raw materials, taxes, transportation plus Rs. 45 per case of production under the Fourth Schedule. From the final realization of price on sale of the goods after GDPL gets its fixed bottling fess , RKL meets its expenses and profits for having undertaken the venture. RKL is thus liable for its own losses as set out at page 848. There can be no business auxiliary service, if such are the terms that one can incur losses.
* Article 21 provides that GDPL has to be paid for various expenses and taxes which are again reflected in Schedule III.
10. The learned Advocate also submitted that the risk of the entire activity shall be owned by RKL and if at all the CBU incurred any expenses those expenses shall be compensated.
11. By going through the terms of the agreement prima facie we are of the opinion that these agreements have been prepared by RKL with malafide intention to avoid payment of service tax leviable on them under the category of business auxiliary service as the applicants are involved in the activity of promotion marketing of the IMFL manufactured by the CBU shall have the brand owned by the RKL. These brands shall promote the sale of IMFL manufactured by the CBU. The applicants heavily relied on the Board Circular No. F.No.249/1/2006-CX.4 dated 27.10.2008. We have gone through the said Circular that the Circular is in relation to CBU wherein it has been clarified that CBUs are although not liable to pay Central Excise duty on the IMFL manufactured by them as the same is excisable under stayed therefore service tax cannot be demanded from them on account that they are not manufacturer as per Section 2(f) of the Central Excise Act, 1944. In that Circular it is clarified that the IMFL manufactured by them is not liable to excise duty under Central Excise law but they are manufacturer of IMFL. Hence, they are not covered under the category of Business Auxiliary Services. Therefore, the Circular is not relevant at all to the facts of this case. It is an admitted fact that the IMFL has been cleared by CBU under their own invoices and the payments have been received by them from their buyers although the account was having the control of the RKL as per their agreement. Clause of control of Bank accounts of CBU by RKL is no violation to the provisions of law as these are separate entity and they are entitled to maintain their bank account independently but to avoid the payment of service tax these types of clauses have been inserted malafidely. As RKL is providing service of promoting of sales to the CBU in procurement of raw material giving technical knowhow and for the personnel. Therefore, we are of the view that the activities undertaken by RKL is covered under the category of Business Auxiliary Services. Therefore, we direct the applicants to make a pre-deposit of entire service tax demand within four weeks from today. On such compliance being report, pre-deposit of interest and penalties shall remain stayed during pendency of the appeal. Failure to comply with this direction shall result in vacation of stay and dismissal of appeals without prior notice.
12. Compliance is to be reported on ..
(Mathew John) (Ashok Jindal) Member (Technical) Member (Judicial)
The Appellant (hereinafter referred to as RKL) is the owner of various liquor brands of Indian Made Foreign Liquor (IMFL) and is engaged in manufacturing of IMFL in its own distilleries and also under contract manufacturing arrangements. In the liquor industry, it is a common practice that the brand owners have contract bottling arrangements with contracted distilleries that hold the license to manufacture under the State Excise laws in different states. This business model adopted by brand owners in the liquor industry is primarily because of restrictions on issue of new licenses by the State Governments. As a consequence of the business model, RKL entered into two different types of commercial arrangements viz., Brand Licensing Arrangements (3 contracts) and Contract Bottling Arrangements (38 contracts). As a part of process under contract bottling arrangement Brand Owner receives the full proceeds of the sale from which an agreed amount is paid to the CBU and the rest retained by the brand-owner. It is from this amount that the brand owner meets expenses like raw material cost, packing material cost, freight, selling and marketing expenses, personnel and overhead costs, cash discount, interest on working capital etc. The surplus left is retained by the Brand owner.
Brand Licensing agreements are in the nature of contracts for the licensing of brand / trade mark by the Brand Owner (for short BO). Under such licensing agreements, a license to use the brand / trade mark is given to the licensee. During the period Sep2004 to March 2005 RKL paid service tax of Rs.8,51,779/- under Intellectual Property Right service on the royalty received from the parties covered under brand licensing arrangements for the services provided to distilleries in the State of Tamil Nadu.
2.4 RKL has entered into contract bottling agreements with 38 CBUs for the purposes of manufacture of alcoholic beverages of its various brands. The essence of such contracts is that CBU undertakes manufacturing and bottling operations for which they are remunerated on the basis of number of units manufactured / bottled. In the event that the CBU contract is revoked and terminated the CBU has no inherent or vested right to manufacture the product of the brand. RKL exercises complete control and supervision over the operations undertaken by the contract bottling units.
Show Cause Notice dated 24.10.2008 3.1 Certain investigations were conducted by DGCEI and statements were recorded from time to time regarding the taxability of the arrangements between the CBU and BO under service tax law. On 24.10.2008 a show cause notice was issued to RKL proposing to demand service tax amounting to Rs.31,79,83,895/- for the period July 2003 to March 208 alleging that RKL was providing taxable service under the category of business auxiliary service to the CBUs under the Contract Bottling Arrangements. RKL filed a detailed reply dated 12.05.2009 contesting all the allegations and also appeared for personal hearing before the Ld. Commissioner (Adjn,), Delhi on 29.6.2009 and again on 11.12.2009. The Ld. Commissioner passed the impugned order dated 20.01.2010 confirming the entire demand of service tax besides demanding interest under section 75 and imposing penalties under section 77 and 78 of the Act.
Findings of the Ld. Commissioner in the impugned order-in-original.
3.2 The Ld. Commissioner vide the impugned order dated 20.01.2010 while confirming the demand observed as under:
* The terms and conditions of the agreement indicates that RKL were rendering various services to CBUs and were exercising control over the activities and decision making processes relating to manufacture and marketing of RKL brand products. (Page 101 para 33.1) * The distillers were the actual manufacturer and owner of the goods produced under the agreement and under State Excise laws. The distillers were the recipient of services provided by RKL like procurement of raw material / packing material on behalf of them, permitting use of their brand name, promoting the product, providing marketing services, procurement of orders for supply of finished goods and collection of sale proceeds. In return for these services, RKL was allowed to retain a specified part of sale proceeds collected by them on behalf of distillers / bottlers. (Page 101 para 33.1) * The goods viz., RKL brand and product IMFL were manufactured, owned and sold by the respective distilleries and RKL was entitled to a predetermined share of surplus after deducting the various cost. It was no where provided that the profit or the risk involved in the venture is to be shared between the two parties. RKL was entitled to share the surplus only but has no obligation to share the risk or loss if any as per this agreement. (Page 101 para 33.1) * It cannot be considered on the basis of the terms of the agreement that the business was run at the reward and hazard of RKL. The respective distilleries were only the manufacturers and owners of the goods marketed under the RKL brand. RKL was collecting the sales proceeds of IMFL sold on behalf of the respective distillers. The amount so retained by them would constitute the remuneration for the services rendered by them. (Page 102 para 33.1) * The extent of control over the procurement of raw material, payment to vendors of distillers, marketing and realization of sales proceeds, etc., only show that RKL was in a dominant position to dictates its terms as per agreement while agreeing to provide the services to the various distillers. These term and conditions giving dominant position to RKL may be commercially acceptable in view of the financial and commercial status of RKL. Nonetheless, the control over the sales proceeds and manner of marketing could not negate the fact that the various distillers were the manufacturers and the owners of the IMFL manufactured under the trade mark / brand name of RKL. Thus, it was held that the distillers were the manufacturers and owners of goods and RKL was provider of services to them. (Page 102 para 33.1) * RKL is also providing IPR services to distillers, the essential character of the whole transaction was to promote the business of distiller and even the IPR services contribute towards that end. Thus, the services provided by RKL to distillers are more appropriately classifiable as business auxiliary services. (Page 102 para 33.2) * The circular F.No.249/1/2006-CX.4 dated 27.10.2008 issued by CBEC is not applicable to the present case as the various distillers cannot be considered as the job-worker of RKL. (Page 106 and 107 para 34) * The provisions of extended period as provided under section 73(1) of the Act is invokable in the instant case as RKL suppressed from the Department the fact they were providing taxable services to their various clients with clear intent to evade payment of service tax.
OUR SUBMISSIONS
4. RKL submits that the findings of Ld. Commissioner in the impugned order are entirely incorrect for the reasons mentioned in the following grounds A. RKL is not providing any service to CBU as per the terms of the Agreement 4.1 Under the contract bottling arrangement, the brand owner uses the brand on his own account, the property and risk in the bottled alcoholic beverage vests in the brand owner and the commercial motivation of the CBU is to manufacture the liquor and earn a fixed bottling fees and the commercial motivation of the brand owner is to earn profits from the sale of the branded alcoholic beverages. In this regard, it is relevant to examine the various provisions of the contract dated 12.4.2004 entered into between the appellants (RKL) and Gemini Distilleries (Goa) Pvt. Ltd., which are running from pages 825 onwards. The agreement was amended on 1.6.2004. The amendment noticed is at page 846. In order to prove that the contention of the Commissioner in the impugned order that the appellants provide various services is incorrect, it is necessary to examine the following clauses of the contract. For the sake of ready reference a copy of agreement between RKL and GDPL (pages 825 to 850) is enclosed as Annexure 1.
* Article 11 at page 832, provides that RKL shall depute necessary commercial and technical personnel at the bottling unit for the duration of the Agreement who shall carry out and responsible for approval of quality of spirit received, stored or used for blending; supervision of blending operations; approval of all qualify of blending and packaging materials; approval of the quality of blends and packaging of IMFL; providing standards of finished products; coordination of manufacturing process and supplies to authorized parties and any other functions, which need to be carried out in the blending operations of IMFL manufactured at bottling unit. In this regard it may be noted that the key executive who controls the blend quality is blender and is on the pay roll of RKL The role of the blender is to ensure quality output, maintain the recipe and quality guidelines issued from head office of RKL from time to time. Sample copies of check sheets maintained by the quality control department are at pages 373 to 378.
* Article 18 at page 834 - RKL provides working capital finances to CBU, and all lien is in favour of RKL. GDPL cannot create any lien on the raw materials or the finished goods etc. The bank account is operated by two RKL authorised representative.
* Article 19 at page 835 - as regards the opening of the bank account where the bank account is showing the name GDPL A/c Radico Khaitan Ltd. and the cheques are deposited in this account. The working capital is secured by RKL by way of various stocks of finished goods as also inputs etc. and GDPL cannot create any lien on these stocks.
* Article 9(d)(ii) at page 831 provides that RKL has to issue an undertaking that it shall settle all outstanding purchases made for RKL products.
* Article 9(e) at page 831, it is relevant that if any input materials become unusable at the instance of RKL, they will be returned to RKL. So also for IMFL manufactured at the instance of RKL or any inputs or packaging materials remaining unutilized for more than two years, the cost of destruction and reprocessing of stocks has to be borne by RKL * Article 20 pertains to distributable surplus which is to be read along with the Third Schedule at page 845. The Third Schedule at page 845 refers to the distributable surplus to be apportioned between GDPL and RKL @ 16% and 84% respectively. By the amendment carried out on 1.6.2004 relevant at page 847 and 848 GDPL gets Rs.45/- per case and the raw materials cost and taxes. Entire surplus thereafter is of RKL who thus undertakes the risk in the venture and liable for its own losses.
* Thus, from Third Schedule at pages 848 and 849 it can be seen that GDPL would be entitled to raw materials, taxes, transportation plus Rs. 45 per case of production under the Fourth Schedule. From the final realization of price on sale of the goods after GDPL gets its fixed bottling fess , RKL meets its expenses and profits for having undertaken the venture. RKL is thus liable for its own losses as set out at page 848. There can be no business auxiliary service, if such are the terms that one can incur losses.
* Article 21 provides that GDPL has to be paid for various expenses and taxes which are again reflected in Schedule III.
4.2 Thus, the agreement when read as a whole clearly shows that the parties have agreed to do their respective obligations in the business. GDPL is ensured of all its expenses of manufacturing which shall be given to it from the realisation. Thereafter, only the balance revenue is of RKL. In other words, it is evident from the scope of the functions and responsibilities, RKL have a clear interest in the successful running of the venture, and bear the risk of the venture.
B. Risk and Reward with RKL (BO) 5.1 It is further submitted that out of the total revenue generated CBU is entitled for a manufacturing fee / bottling charges which is fixed per case. Whatever left is of the appellants, to meet their expenses and then lastly make profits ( residual). In other words, CBU is entitled for all its expenses and any gain or loss arising out of this arrangement is purely on account of the appellants. The Ld. Commissioner has held that there is no loss or risk to RKL which is totally wrong. The figures of sharing of 86% (RKL), 14% (GDPL) before amendment (referred to by learned commissioner) also shows that GDPL renders service and not RKL. This is also subsequently modified for payment of fixed fees based on per case produced, which also limits his interest to the extent of bottling charges. Furthermore, from the contract itself there are various clauses which obligate RKL showing clearly that the contention of the Commissioner is wrong.
* Article 4(i) at page 829, it can be seen that RKL has to indemnify GDPL against all claims, liability etc. which arise against GDPL or suffered by it in respect of dispatches made on indent / instructions of RKL. This clause is thus couched in the widest terms and the risk in the venture is of RKL.
* Article 4 provides that RKL is responsible for causing the sale of the products manufactured by GDPL by procuring orders for RKL brands and products manufactured under the agreement. . The batch for production is decided by RKL staff which differentiates one brand from another and after changeover the blending tank is expected to be cleaned and rinsed as per defined procedure. Sample production planning sheet can be seen at pages 496 to 509.
* Article 10(c) at page 832 it can be seen that RKL is responsible for arranging necessary insurance policy to cover the various fire insurance risks on stock of IMFL, raw material, packing material and stock in progress and other related stock / material stored at different locations and finished goods being used to manufacture the RKL products and the cost of premium is to be borne by RKL. Sample insurance policy is at pages 550 552) * Article 11 at page 832, provides that GDPL while receiving materials acknowledges the breakages, and such breakages, shortages and damages in transit are to RKL account. At page 434 of the paper book in regard to such shortages, GDPL has raised debit note on RKL giving effect to Article 11, showing the risk is on RKL for the venture.
* Article 15 at page 834 shows that scrap generated during manufacture of RKL products has to be disposed of by GDPL as per the price and terms of RKL and sale proceeds have to be credited to RKL account. Sample invoice in this regard of scrap sale at page 613 mentions RKL running invoice number.
* From Article 18 C at page 835 it can be seen that GDPL does not have any lien nor it can create any charge on any raw material, packaging material relatable to RKL brand and products. GDPL cannot take any finance on any raw materials and receivables related to RKL products and have to issue no lien certificate to RKL. A copy of such no lien certificate is at page 603.
* Article 28(d) at page 839 provides that on the termination of the agreement, RKL will purchase at actual cost all the stocks or materials and the finished products with GDPL.
5.2 It is further submitted that RKL prescribes the complete sale control mechanism and is responsible for all sales and distribution activities. The discounts offered to the trade are decided by RKL sales team. There are separate sales promoters / C&F agents appointed by RKL to take care of post manufacturing activities. The sales orders are booked by RKL sales executives, totalling around 250 numbers all over India, who are employees of RKL. It is further submitted that the invoicing shows that it is on account of RKL A/c RKL i.e., on behalf of RKL and GDPL are not owners of the goods. In other words RKL is providing these marketing activities for self and its own vested interests and not to CBU. Sample copies of correspondence exchanged between RKL and GDPL in connection with orders procured as also the direction given by RKL to GDPL for effecting sales can be seen at pages 533 to 538.
5.3 Thus it is submitted that the extent of involvement of RKL in the entire business starting from deciding purchase price of the raw materials including packing materials to the fixing of selling price of the manufactured product shows that CBU are given their due and RKL drives the venture. Thus the RKLs share in the revenue is not fixed but is based on generation of surplus whereas GDPL gets the quantified amount and has to be paid off first, the raw material costs etc. and Rs.45/- per case. Thus, the entire risk of the business is on RKL by receiving the surplus and not in the form of an assured amount.
5.4 The Commissioner has relied on Article 9 at page 831 that GDPL will purchase all the raw materials etc. of the quality stipulated by RKL from the parties nominated and that the prices are approved by RKL. When the material is procured, GR shows as account RKL at pages 568 and 569. However, it is pertinent to note that under Article 9(d)(ii) (page 831), RKL has to issue an undertaking that it shall settle all outstandings pertaining to the purchases made for RKL products. The term service charges meant only due diligence of CBU to maintain accounts for any expenses incurred by RKL upfront which as per Schedule III is to the account of GDPL. Under Article 9(e) (page 831), it is relevant that if any input materials become unusable at the instance of RKL, they will be returned to RKL and IMFL manufactured at the instance of RKL or so also any inputs or packaging materials remaining unutilized for more than two years, the cost of destruction and reprocessing of stocks has to be borne by RKL. As already submitted under Article 18 (page 834), the working capital has to be provided by RKL and further under Article 13 (page 833), the wastages are to the account of RKL within the permissible limits laid down in the contract.
5.5 Further, under Article 4(i) at page 829, GDPL has to be indemnified against all claims etc. in respect of dispatches made on instructions of RKL. Sample copy of summons issued by the Inspector Weights & Measures, Ujjain (M.P) dated 17.9.2007 and Inspector of Legal Metrology, Nagpur dated 20.09.2007 issued to RKL for non-compliance of provisions of Standards of Weights & Measures Act and PC Rules and the letter dated 2.2.2011 issued by the Canteen Stores Department, Ministry of Defence alleging quality deviation are collectively enclosed as Annexure 3. Hence the law itself recognises RKL to be the person having undertaken the venture.
C. Representations made by Industry to CBEC 6.1 A draft circular dated 5.10.2006 (Annexure 2) for eliciting response and comments from the trade was issued by CBEC on the issue of levy of service tax on CBUs under business auxiliary service for manufacture of IMFL, wherein it was clarified that the activity of manufacture, by a distiller, in respect of IMFL would be covered under the category of business auxiliary service.
6.2 It is submitted that RKL actively through the federation viz., Confederation of Indian Alcoholic Beverages Companies (CIABC) has made several representation for example 29/06/2007 seeking clarifications on its taxability, wherein the entire arrangement prevalent in the industry was explained to CBEC. Sample copy of the representations may be seen at pages 752 to 854 Vol. II Paper book filed along with appeal) relevant at pages 763, 770-779, 786 and 787 which covers the exact fact situation reflected in the GDPL contract.
6.3 Based on these representations, the CBEC issued the circular dated 27.10.2008 in which the terms of agreement which is identical to the agreement between RKL and CBU was analysed in great detail and clarified that in respect of contract bottling arrangements, the CBU is providing service to BO.
D. CBU is the service provider and the appellant is the service receiver, is supported by Circular dated 27.10.2008 issued by CBEC.
7.1 The Commissioner has declined to follow the Circular F.No.249/1/206-CX.4 dated 27.10.2008, which was issued in the context of service tax liability on production of alcoholic beverages on job work basis, wherein the Board has clearly held that in all such cases, the services are being rendered by the CBU to the brand name owner. This was held on the ground that such a circular pertained to a case where bottler was a job worker and that in the present case, the bottler is not a job worker and therefore circular would not be applicable. In this regard, it is respectfully submitted that the same view has been reaffirmed that the bottler under such arrangement is service provider once again and has been subjected to service tax under business auxiliary service effective from September 2009. In fact the circular itself records:-
... 03. 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 licences / 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.... 7.2 The appellant submits that earlier service tax could not be levied under business auxiliary service if the process amounted to manufacture. In such a situation, it was held that since the bottler performs the manufacturing process of manufacturing and bottling the liquor, hence business auxiliary service is not attracted. However, the amendment was carried out in the provisions of business auxiliary service by the Finance Act, 2009 whereby it was held that business auxiliary service would only exclude such activities which amount to manufacture of excisable goods under central excise law and service tax will be applicable on 22.9.2009. Consequently, service tax is being paid by the CBUs from September 2009 as business auxiliary service under the same agreements.
7.3 CBUs are now asked to charge service tax on the ground that they are rendering business auxiliary service to the appellants. Sample copy of the service tax registration certificate in ST-2 taken by N.V. Distilleries & Breweries (P) Ltd., Bhagwanpur, Barwala Road, Punjab subsequent to the introduction of levy of service tax on CBU under business auxiliary service vide Finance Act, 2009 along with copy of service tax return is enclosed as Annexure 4. M/s N. V. Distilleries & Breweries (P) Ltd. is one of the 38 CBUs covered by the impugned order of the commissioner for demanding service tax from RKL.
7.4 In view of the above it is humbly submitted that with all the clauses of the agreement and the intent of department, it is clear that RKL is not providing any business auxiliary service to CBU and accordingly the impugned order is liable to be set aside. On the contrary GDPL is rendering business auxiliary service to RKL, as held by the CBEC circular dated 24.10.2008.
G. Demand is barred by limitation 8.1 The Ld. Commissioner in the impugned order has also held that the extended period is applicable, since RKL has not taken a licence and has not disclosed to the department its activities. This is clearly wrong and incorrect. It is hereby submitted that the show cause notice is for a period from 7/03 to 3/08 and the date of the show cause notice is 24.10.2008. The applicant submits that the extended period would not be applicable, since it was pointed out in the reply to the show cause notice that many show causes/ notices/summons have been issued during this period to the CBUs listed at page 266 and the activities of Brand owner and bottler was within knowledge of department. Sample copy of show cause notice dated 22.09.2005 issued to CBU demanding service tax on bottling charges under business auxiliary service can be seen at page 889 (Refer page 885 to 902). The department in these show causes emphasised that CBUs are rendering service to RKL and not vice versa. In the summons, the various agreements between the brand owners and the CBUs were also asked for by the department way back in April 2005 and the same were submitted by letter dated 21.04.2005 at page 886. In fact based on supply of contract with RKL, the bottler was issued show cause notice dated 22.09.2005 (page 889) that CBU is rendering business auxiliary service to RKL.
8.2 In this regard it is submitted reliance is placed on the decision of the Honble Supreme Court in the case of M/s Benara Valves Ltd., vs CCE, 2006 (204) E.L.T. 513 (S.C.) at para 8 held as under:
8. It is true that on merely establishing a prima facie case, interim order of protection should not be passed. But if on a cursory glance it appears that the demand raised has no leg to stand, it would be undesirable to require the assessee to pay full or substantive part of the demand. Petitions for stay should not be disposed of in a routine matter unmindful of the consequences flowing from the order requiring the assessee to deposit full or part of the demand. There can be no rule of universal application in such matters and the order has to be passed keeping in view the factual scenario involved. Merely because this Court has indicated the principles that does not give a license to the forum/authority to pass an order which cannot be sustained on the touchstone of fairness, legality and public interest. Where denial of interim relief may lead to public mischief, grave irreparable private injury or shake a citizens faith in the impartiality of public administration, interim relief can be given. 8.3 Thus, in view of the above, when department always treated CBU as the provider of business auxiliary service and the activities were within knowledge of department during the period covered under demand, extended period of limitation can never be applied.
9. In view of the above, the appellants have strong prima facie case in their favour on merits as well as on limitation and humbly pray that stay may be granted.
10. On the other hand, the learned DR submitted that the services rendered by the appellants under the contract are classifiable under business auxiliary service. To support his contention he submitted that the appellants are promoter and marketer of the product viz. Indian made foreign liquor and their client as manufacturer. As per the agreement the appellants are assisting in procurement of raw material promoting, marketing of the IMFL manufactured by the client. The client will purchase the raw materials, consumables, blending material, packaging material, ensure storage facilities, quality control and their clients have the power to enter into further contract with some other persons. It is also clear from the agreement that all the costs including those incidental/auxiliary are borne by the clients only. He further submitted that the clients are clearing the goods under their sale invoices. The relation between the appellant and clients are principal to principal basis and there is no principal and agent relationship. The clients are bearing all the expenses and cost for manufacture of the products. The sale value of the goods sold by the clients through invoices and further deduction of the various costs, the client pays the appellant for their rendering services through split in revenue stream. The clients were responsible for its own working capital finance and the appellants only helpsin contingency with finance secured by lien. The bank accounts are to be maintained by the clients only. From the agreement it is cleared that the client is the manufacturer and the appellants are providing service to their clients for procuring raw material as well as in selling of the goods and financing to their clients as per their requirements. It is evident from the agreement that are at variance from the facts in circular and therefore the question of law subject of matter of circular is not applicable to the facts of this case. He further submitted that the reliance placed by the learned Advocate in the case of Prestige Engineering v. CCE - 1994 (74) ELT 497 (S.C.) where it has been held that job worker only contributes labor and skill and not the raw material which are not the facts in this case. In fact, in this case the clients owns raw materials and contributes more than just labour and skill, therefore clients are not the job worker. As per Section 65 (105) (zzb) defines that any service provided or to be provide to a client by any person in relation to business auxiliary service is liable for service tax and the activity under taken by the appellants are covered under business auxiliary service. Therefore, he submitted that the appellants may be asked to make entire pre-deposit at this stage for which he relied on the following case law:-
(a) .
(b)
11. Heard and considered.
(Pronounced in open Court on (Mathew John) (Ashok Jinda) Technical Member Judicial Member nsk 34