INPUT SERVICES AS INTERPRETED IN COCA COLA CASE

[Dr. Sanjiv Agarwal]

Coca Cola India Pvt Ltd v CCE, Pune-III [2009 -TMI - 34433 - BOMBAY HIGH COURT]

The Bombay high court in  Coca Cola India Pvt Ltd v CCE, Pune-III  [2009 -TMI - 34433 - BOMBAY HIGH COURT] provides  the impact of  widening of the scope of activities relating to business for the purpose of service tax and that service tax is a destination based  consumption tax.

Relevant Rule

            Rule 2 (l) of Cenvat credit Rules 2004 defines 'input service'. Input service would mean any service which is received and consumed by service provider in relation to providing an output service, or which is used by manufacturer, directly or indirectly in relation to manufacture of final products and clearance of final products upto the place of removal. Thus, input services could be used by an output service provider or a manufacturer in relation to providing service or manufacturing a final product. Input service will also include services used in relation to any one or more of the following —

     (a) setting up of a factory,

     (b) setting up of a premises of output service provider,

     (c) setting up of a office relating to any factory or premises,

     (d) advertisement or sales promotion,

     (e) procurement of inputs,

     (f) activities relating to management of business (say, business auxiliary services) such as —

           (i) accounting,

          (ii) auditing,

          (iii) financing,

          (iv) recruitment,

          (v) quality control,

          (vi) coaching and training,

          (vii) computer networking,

          (viii) credit rating,

          (ix) share registry,

          (x) security,

          (xi) inward transportation of inputs or capital goods,

          (xii) outward transportation upto the place of removal,    

            The definition of Input Service has been amended w.e.f. 11.4.2008 so as to provide that 'clearance of final products up the place of removal' will only be considered as input service. This amendment will avoid disputes in future relating to credit on outward freight on GTA service. The amended definition substitutes the words 'from the place of removal' by 'upto the place of removal'.

Other Pronouncements

            The Tribunal in the case of CCE v. Deloitte Tax Services India (P) Ltd [2008 -TMI - 3715 - CESTAT, BANGALORE] has held that services such as equipment hiring, professional consultation service, recruitment service, security service, telephone service, transport service, training service, facility operation service, courier service, cafeteria service and advertisement service are to be considered as input services in relation to rendering of business auxiliary services.

In CCE, Vapi v. Alidhara Textool Enginers Pvt Ltd [2009 -TMI - 33376 - CESTAT AHMEDABAD], it was held that the incidental process of erection and commissioning being incident to manufacture, has to be treated as continuation of the earlier process which started in the manufacture's premises. In the case of service tax, what is required to be examined is whether the service has been used in or in relation to manufacture directly or indirectly. While the eligibility for service tax credit on outward transport services is to be examined in connection with place of removal, there is no such requirement as regards other services. In respect of other services, what is to be examined is whether they can be held to be rendered in or in relation to manufacture directly or indirectly.

In Rohit Surfactants Pvt Ltd v. CCE, Bhopal [2009 -TMI - 34961 - CESTAT, NEW DELHI], it was held that in the definition of input service, the words 'directly or indirectly in or in relation to manufacture' should be given very vide meaning. Also, the list of services is not exhaustive since words, 'such as' are used after 'services used in relation to activities relating to business. Telephone services, insurance services, banking services and courier services would also be covered by the expression 'services used directly or indirectly is or in relation to the manufacture of finished goods'. The use of words 'such as' indicates that the list of services in this category is it not  exhaustive. [Also see Keltech Energies Ltd v. CCE, Mangalore [2008 -TMI - 4051 - CESTAT BANGALORE]

Background of Coca Cola Case 

            In Coca Cola India Pvt Ltd v. CCE (Central Excise Appeal No. 118 of 2007, Order dated 26.8.2009-unreported), Bombay high court [2009 -TMI - 34433 - BOMBAY HIGH COURT] has held that service tax paid on expenditure incurred by assessee on advertisements, sales promotion, market research, etc are allowable as input tax credit, more particularly, if the same costs form part of the price of final product of assessee on which manufacture pays the excise duty. If such input credit is not allowed, it would defeat the very purpose and genesis of Cenvat, ie, value added tax. The issue before court was whether Coca cola, who are manufacturers of non-alcoholic beverage bases (concentrates) are eligible to avail credit of the service-tax paid on advertising services, sales promotion, market research and the like availed by them and utilize such credit towards payment of excise duty on the concentrate.

            High court held that service tax is VAT which in turn is destination based consumption tax in a sense that it is on commercial activities and is not a charge on the business but on the consumer. Just as excise duty is a tax on value addition on goods. Service tax is on the value addition by rendition of service. (All India Federation of Tax Practitioners v. Union of India [2007 -TMI - 1556 - Supreme Court].

            It held that the definition of input services employs the phrase 'activity relating to business'. The words 'relating to' further widens the scope of the expression activities relating to business. Similarly, the use of the word activities in the phrase activities relating to business further signifies the wide import of the phrase "activities relating to business. The Rule making authority has not employed any qualifying words before the word activities, like main activities or essential activities etc. Therefore, it must follow that all and any activity relating to business falls within the definition of input service provided there is a relation between the manufacturer of concentrate and the activity. Therefore, the phrase "activities relating to business are words of wide import.  

Input Services Analyzed

            The definition of input service which has been reproduced earlier, can be effectively divided into the following five categories, in so far as a manufacturer is concerned:

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

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

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

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

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

            Each limb of the definition of input service can be considered as an independent benefit or concession or exemption. If an assessee can satisfy any one of the limbs of the above benefit, exemption or concession, then credit of the input service would be available. This would be so even if the assessee does not satisfy other limb/limbs of the definition. The court concluded that the credit is availed on the tax paid on the input service, which is advertisement and not on the contents of the advertisement. Thus it is not necessary that the contents of the advertisement must be that of the final product manufactured by the person advertising, as long as the manufacturer can demonstrate that the advertisement services availed have an effect of or impact on the manufacture of the final product and establish the relationship between the input service and the manufacture of the final product. The manufacturer thereby can avail the credit of the service tax paid by him. Once the cost incurred by the service has to be added to the cost, and is so assessed, it is a recognition by Revenue of the advertisement services having a connection with the manufacture of the final product. This test will also apply in the case of sales promotion.

Other Interpretations

The court went on to interpret the terms 'include', 'such as', 'means' and 'business' It observed that the expression business is an integrated/ continuous activity and is not confined or restricted to mere manufacture of the product. Therefore, activities in relation to business . the term business therefore, in our opinion cannot be given a restricted definition to say that business of a manufacturer is to manufacture final products only.

Business comprises of the regular and systematic activity with an object of earning of profits. The machinery, plant , building and the land over which they have erected or constructed are only the tools of such business. Assets and liabilities including goodwill are the necessary ingredients to constitute a business, besides the stocks and other movable and immovable items connected with the said business .

In Doypack Systems Pvt. Ltd v. Union of India (1988) 36 ELT 201(SC), it was held that the expression ' in relation to' is a very broad expression which pre supposes another subject matter. These are words of comprehensiveness which might both have a direct significance as well as indirect significance depending upon the context.

The high court also made observations on nature of service tax. Service tax like cenvat is basically a value added tax which is operated through credit mechanism. (refer Circular No 80 dated 17.9.2004). Service tax is a destination based consumption tax and it is not applicable on export of services (Circular No 56 dated 25.4.2003).  

Nature of Service Tax

The basic Approach adopted by India is to tax services on the destination cum consumption principle which is in line with the international norms . A consumption tax derives its name from the fact that tax burden is ultimately borne by the final consumer and business does not bear the burden of the tax, since the business are allowed to take credit of tax paid on inputs supplied/ received by them. If therefore Cenvat is denied to the input service received by the assessee as in the present case, they will become burden  to the assessee, which is against the very grain or principle of VAT being a consumption tax.

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

The Final Verdict

The court concluded that  the credit is availed on the tax paid on the input service, which is advertisement and not on the contents of the advertisement. Thus, it is not necessary that the contents of the advertisement must be that of the final product manufactured by the person advertising, as long as the manufacturer can demonstrate that the advertisement services availed have an effect of or impact on the manufacturer of the final product and establish the relationship between the input service and the manufacture of the final product. The manufacture thereby can avail the credit of the service tax paid by him. Once the cost incurred by the service has to be added to the cost, and is so assessed, it is a recognition by Revenue of the advertisement services having a connection with the manufacture of the final product. This test will also apply in the case of sales promotion.