BRAND PROMOTION AS BUSINESS AUXILIARY SERVICE ?

[Dr. Sanjiv Agarwal]

Though we are now in an era where goods and services, both shall be taxed under one tax, i.e. Goods and Services Tax (GST), the indirect tax Tribunal, CESTAT has recently settled a confusion or dispute on taxability of brand promotions activities as business auxiliary services. In GST, it would remain a service only.

The case on hand is Datamini Technologies (India) Ltd. v. CCE, Thane-I 2016 (12) TMI 1535 - CESTAT MUMBAI = (2017) 51 STR 145 (Cestat, Mumbai-TM) which is a majority order after reference to third member. It is a common order for Datamini and Zenith Computers Ltd. The activities involved are of promotion of a brand, logos of Intel Corporation and Microsoft Corporation, suppliers of components of personal computers manufactured by the assessee which were incorporated as foot note to the advertisements of personal computers. The revenue demanded Service Tax under business auxiliary services on the ground that reimbursement of advertisement expenses received from Intel and Microsoft were taxable services of assessee. The case of Revenue is that these displays are for a consideration and the said consideration is taxable under Section 65(105)(zzb) of Finance Act, 1994 for having rendered 'business auxiliary service' within the meaning of Section 65(19)(i) of Finance Act, 1994. M/s. Datamini Technologies (India) Ltd. and M/s. Zenith Computers Ltd. were determined as being liable to tax.

It was observed and held that key element in definition of business auxiliary service' are goods in relation to which services rendered. Goods are to be produced or provided by or belonging to client. Goods supplied by Intel Corporation and Microsoft Corporation are bought by assessee thus ruling out an allegation that service is rendered by assessee in relation to these goods. Assessee uses products of Intel Corporation and Microsoft Corporation, not to sell them as such but to manufacture personal computer. The portion of definition relating to sale of goods referred to in Section 65(19) (i) of Finance Act, 1994 will not apply. Assessees are manufacturers of branded products and it cannot be inferred that in process of promoting their own products, they marketed components in personal computers for consideration paid by Intel Corporation and Microsoft Corporation. Assessees are reimbursed some portion of cost of advertising and publicity conducted upon inclusion of logos of two entities in their advertising and publicity material. The reimbursements are drawn from a fund created out of contribution of two entities that is directly linked to purchases effected in past by assessee. There is no connect between source of contribution for publicity campaign and outcome of publicity campaign. The scale and reputation of assessee is incomparable with two global giants. It is therefore, difficult to conceive that products of these two entities will find additional acceptability in the market owing to inclusion of their respective logos. Assessees' products likely to find greater acceptance among potential customers owing to the acknowledged incorporation of products of two entities in computers manufactured by them. Reimbursements are circumscribed by funds added in proportion to procurements effected by assessee from two suppliers and not from enhanced sales attributed to alleged promotion of product would reinforce conclusion that objective of schemes not enhancement of customer-base of these two entities and, thus, not in consonance with definition of taxable activity in Section 65(19)(i). Scheme incentivizes assessees to procure more products from two suppliers and to enhance sales of computers manufactured by two assessees. Such a benefit to assessees would not qualify as promotion of product of client. This activity of assessees is not promotion to branded goods of Intel Corporation and Microsoft Corporation and not taxable as 'business auxiliary service'.

Since there was a difference of opinion, the following question was refereed to third member for decision by majority:

"Whether the Member (Judicial) is correct in holding that the appellants are engaged in the activity of promoting the brand of Intel Microsoft consequently, the activity of 'promotion or marketing of logo or brand' does not cover under the category of Business Auxiliary Service by relying on the judgment of Jetlite (India) Ltd. 2010 (12) TMI 40 - CESTAT, NEW DELHI ."

Tax under Section 65(105)(zzb) of Finance Act, 1994 is liable upon rendering of 'service provided or to be provided to a client by any person in relation to business auxiliary service'.  Section 65(19) of Finance Act, 1994 defines the activity thus –

'Business Auxiliary Service' means any service in relation to -

1. promotion or marketing or sale of goods produced or provided by or belonging to the client; or
2. promotion or marketing of service provided by the client; or
10930866.  

7. a service incidental or auxiliary to any activity specified in sub- clauses (i) to (vi), .............'

A key element in the definition of 'business auxiliary service' are the goods in relation to which service is rendered. The goods are to be produced or provided by or belonging to the client. There is no dispute that the goods supplied by Intel and Microsoft are bought by appellants thus ruling out an allegation that service is rendered by appellants in relation to these goods. Neither do the facts hold that goods are provided by Intel or Microsoft to the appellant for rendering of services.

Appellants use the products of Intel and Microsoft not to sell them as such but to manufacture personal computer; the portion of the definition supra relating to sale of goods referred to in Section 65(19)(i) will not, therefore, apply to the present dispute. Marketing has many connotations ranging from the most common one, of a foray for purchases, to the professional one, of describing an organized discipline in management of commercial organizations. In the context of its employment in the definition supra, it would appear that legislative intent tends towards the latter. Marketing professionals consider the four Ps to be at the very foundation of their vocation, viz., price, product, promotion, and place. Unless all the four facets are mixed in the formulation of strategy, the expression 'marketing' may not be an appropriate usage and will not apply to the activity undertaken by the appellants.

It is the products that, if at all, may be alleged to be the object of such promotion. 'Promotion of brand' as a taxable service was, as yet, an unheard of activity in the realm of taxable services; and rigorous delineation of brand and product is received wisdom which certainly could not have weighed with the authority issuing the notice or the adjudicating authority.

Appellants are manufacturers of branded products and, by no stretch of imagination, can it be inferred that, in the process of promoting their own products, the components in the personal computers were also marketed for a consideration paid by Intel and Microsoft, Obviously, the allegation of having promoted the products of these two entities , can only be with reference to future releases from the two entities.

Appellants are reimbursed some portion of the cost of advertising and publicity conducted upon inclusion of the logos of the two entities in the advertising and publicity material of the appellants. The reimbursements are drawn from a fund created out of a contribution of the two entities that is directly linked to purchases effected in the past by appellant. There is no connect between the source of contribution for the publicity campaign and the outcome of the publicity campaign.

A question that arises is whether the two supplies benefit in any manner from the inclusion of their logos in the advertisement and publicity material deployed by the appellants. In scale and reputation, appellants are incomparable with the two global giants. It is difficult to conceive that the products of these two entities will find additional acceptability in the market owing to the inclusion of their respective logos. The products themselves are amenable to utilization only by computer manufacturers and the publicity, if any, among the potential customers of the two appellants is unlikely to derive any economic benefits to the supplier.

On the contrary, the products of the appellant are likely to find greater acceptance among potential customers owing to the acknowledged incorporation of the products of Intel and Microsoft in the computers manufactured by the appellants. Such a reversal of roles would alter the relationship in a manner that was not contemplated in the show cause notice. That the reimbursements are circumscribed by funds added in proportion to the procurements effected by the appellants from the two suppliers and not from enhanced sales attributed to the alleged promotion of product would reinforce the conclusion that the objective of the schemes is not the enhancement of the customer-base of Intel and Microsoft and, thus, not in consonance with the definition of taxable activity in Section 65(19)(i) of Finance Act, 1994.

At best, it may be surmised that the scheme incentivizes the appellants to procure more products from the two suppliers and to enhance the sales of the computers manufactured by the two appellants. Such a benefit to the appellants would not qualify as promotion of product of client. Indeed, the impugned order should have ascertained the existence of a client-provider relationship between the appellants and the two suppliers along the nature of the fiscal flow accruing to the appellants as a prelude to determining the taxability.

Therefore, it was held that the activity of the assessees were not of promotion of goods of Intel and Microsoft so as to be taxable under business auxiliary services.