WHETHER REGULATED SALES OF LIQUOR BY GOVERNMENT CORPORATIONS A SERVICE?

[Dr. Sanjiv Agarwal]

The manufacture, distribution and sale of alcoholic beverages is highly regulated by State Governments under the Constitution of India. While there is a requirement of obtaining a license from the State Governments to set up a distillery, no new licenses are being granted. Similarly, the distribution of alcoholic liquor meant for human consumption is regulated by the State Governments in most of the States. The states regulate the trade through Corporations setup by them to regulate licenses, trading, pricing etc and manufacturers have to supply the stock of liquor through these State public sector corporations, subject to liquor policy and state excise offices. In very few states like Gujarat and Bihar, there is a policy of prohibitions.

These Corporations control liquor sales in the respective state and have special privilege under the State Excise Act, i.e., exclusive rights to wholesale foreign made foreign liquor (FMEL), Indian made foreign liquor (IMFL) and beer in the State. The operations are governed by liquor sourcing policy. The modus operandi is like this - manufacturer/supplier places an offer to supply liquor based on the demand prevailing in the respective locations. Thereafter, an order for supply (OFS) is issued to the manufacturer/supplier. Goods invoiced and supplied against OFS are stored in depots of the Corporation. However, risk reward of such stocks vest in the supplier, though Corporation gets such stocks insured at its own cost. Manufacturer/ suppliers undertake the responsibility for creating demand for the goods supplied to the Corporation. Payment for the stocks supplied by the Manufacturer/ Suppliers is made only after such stocks are sold. Stocks remaining unsold after a specified period are subject to levy of Inactive Stock Penalty charges or margin on drain out/return to distilleries at rates specified in the Liquor Sourcing Policy (LSP). This income is recognized in the books of accounts of Corporation.

The illustrative list of income heads, apart from trading margin (sales) are generally in the following form –

• Inactive stock penalties
• Transfer out order (TOO) fee
• OFS extension /  cancellation fee
• Scarp sales
• Demurrage
• Handling charges
• Liquidity damage from suppliers etc.

Based on the excise policy or liquor sourcing policy, the Beverages Corporation may have a system of open market pricing or fixed margin (i.e., gap between purchase and selling price of products) keeping into account the costs and profit margins. Even where the goods are sold on fixed trading margin as a percentage, it can not be termed as a commission, simply because substance over form would prevail and that also accounting and nature of transaction are important to determine taxability.

Beverage Corporations effectively purchase liquor stocks of different brands from suppliers and sell them to licensee for onward retail sale / consumption. While the Corporation treat this transaction as a pure trading activity (buying and selling of goods), the revenue department has been considering the activities of Corporation as business auxiliary services and treating their entire income under different heads as well as trading margin (gap between selling price and purchase price) as commission on sale and taxing them under erstwhile business auxiliary services as defined in section 65(19) and section 65(105) (zzb) of the Finance Act, 1994.

Scope of Business Auxiliary Services

Prior to 1^st July, 2012 when negative list approach was introduced in Service Tax regime, business auxiliary services were defined in section 65(19) of the Finance Act, 1994 which was frequently amended from time to time. The scope of business auxiliary services which was last on statute book is as follows:

 “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
3. any customer care service provided on behalf of the client; or
4. procurement of goods or services, which are inputs for the client; or

Explanation: For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, “inputs” means all goods or services intended for use by the client;

5. production or processing of goods for, or on behalf of, the client;
6. provision of service on behalf of the client; or
7. a service incidental or auxiliary to any activity specified in sub-clauses (i) to (vi), such as billing, issue or collection or recovery of cheques, payments, maintenance of accounts and remittance, inventory management, evaluation or development of prospective customer or vendor, public relation services, management or supervision,

and includes services as a commission agent, but does not include any activity that amounts to manufacture of excisable goods.

In the above definition, ‘commission agent’ meant  any person who acts on behalf of another person and causes sale or purchase of goods, or provision or receipt of services, for a consideration, and includes any person who, while acting on behalf of another person-

1. deals with goods or services or documents of title to such goods or services; or
2. collects payment of sale price of such goods or services; or
3. guarantees for collection or payment for such goods or services; or
4. undertakes any activities relating to such sale or purchase of such goods or services.

Judicial View

In one of the recent judicial pronouncements of Rajasthan High Court in the case of Rajasthan State Beverages Corporation v. CCE Jaipur-I reported in 2017 (11) TMI 1112 - RAJASTHAN HIGH COURT, this issue came up for judicial scrutiny as to whether the corporation which was acting as a canalizing agency for liquor entrusted by the State Government with business of purchase of IMFL and beer from various manufacturers and suppliers, distribution thereof to its various depots and further onward sale to various licensees for retail consumer sale with a view to regulate supply of liquor through conferring the exclusive privilege of purchase and sale in the wholesale thereof upon the appellant. As a consequence of the monopoly assumed by the State Government in this area and conferment of the privilege on the appellant, it is mandatory for all manufacturers / distilleries /suppliers to sell liquor in the State only through the canalizing agency. The appellant was not registered as a Service Tax provider, had not filed returns of Service Tax nor had remitted Service Tax.

While the revenue sought to tax these transactions as business auxiliary services u/s 65(19) read with section 65(105) (zzh) of Finance Act, 1994, the Corporation contended that it was a pure trading transaction and was not subject to levy of Service Tax.

Revenue assumed that the appellant had provided the taxable Business Auxiliary Service (BAS) to manufacturers of liquor/distilleries and issued the show cause notice dated 11-7-2008, in substance alleging that the appellant had provided the taxable BAS and had willfully suppressed information regarding liability to Service Tax by failing to file returns, disclosing the income received and failing to remit Service Tax, with an intent to evade payment of Service Tax. The show cause notice proposed assessment and levy of Service Tax, interest and penalties. The show cause notice proposals were confirmed by the adjudication order, after a due process of considering the appellant’s response, analysis of the material on record and hearing the appellant.

The court tested the taxability in given facts of the case on two grounds, viz, (a) whether the transaction of purchase and sale of liquor falls within the ambit of business auxiliary services, and (b) whether, if even if it is held to be service, it is a service of the kind mentioned in various clauses of section 65(19) which defines business auxiliary services. The court relied upon and followed the decision in following two cases:

1. Hindustan Coca Cola Beverages Pvt. Ltd. v. Commissioner of Income Tax - DBITA No. 205 of 2005, decided on 11-7-2017 by Rajasthan High Court. [ 2017 (7) TMI 1076 - RAJASTHAN HIGH COURT ]
2. Union of India v. Chhattisgarh Estate Beverages Corporation 2015 (3) TMI 744 - CHHATTISGARH HIGH COURT

In Union of India v. Chhattisgarh Estate Beverages Corporation 2015 (3) TMI 744 - CHHATTISGARH HIGH COURT, high court held that corporation being engaged in purchase and sale of liquor could not be considered as a clearing and forwarding agent for the State Government and therefore no Service Tax was payable. The court while deciding that no Service Tax was payable observed as follows:

            “9. It is not disputed that if the Corporation was engaged in sale and purchase of liquor for the State, then no Service Tax was payable.

            10. The Tribunal has recorded a finding of fact that the Corporation was engaged in purchase and sale of liquor and could not be considered as clearing and forwarding agent for the State Government. It is finding of fact. No  illegality in the finding has been pointed out.”

Hindustan Coca Cola Beverages Pvt. Ltd. v. Commissioner of Income Tax - DBITA No. 205 of 2005, decided on 11-7-2017 by Rajasthan High Court. [ 2017 (7) TMI 1076 - RAJASTHAN HIGH COURT ] also covered the similar controversy.

Based on these facts, legal provisions and precedents, high court has decided in favour of Beverage Corporation and against the revenue.

It is pertinent to note that this business model is prevalent in most of the states in India and as such, this clarity on business of liquor trade will pave a way to settle the issue and the ongoing litigation in most of the States.

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