2006 (4) TMI 249 - HC - Service Tax

Bottling of liquor - service tax - Held that - It is clear from the transaction that only the service was to be provided for the purpose of packaging, which was controlled under the condition of tender notice and separate charges were paid for bottling, labelling and sealing, which was not forming part of the price of the country spirit. For country spirit separate bills were raised and for the aforesaid part of packaging service charges were prescribed and there were service obligations to be carried out in the form of bottling while undertaking the packaging activity. There was obligation to reuse the bottle offered by the contractors. The entire mechanism leaves no room or any doubt that it was packaging activity, which was clearly a service activity under Section 65(76)(b) not process of manufacture as defined in Section 2(f) of the Central Excise Act. - . It is clear that Section 65(76)(b) as inserted by the Finance Act, 2005 clearly provides Packaging Activity to mean packaging of goods including pouch filling, bottling, labelling or imprinting of the package and it is clear that as per the conditions of tender notice separate charges are levied for this service, which is provided by the distillers as per1 conditions of tender notice.

Issues Involved:
1. Whether service tax on packaging, i.e., bottling and labeling of liquor, can be exacted from the distillers.
2. Whether distillers can pass on this service tax liability to the contractors obtaining supplies from them.

Detailed Analysis:

1. Service Tax on Packaging of Liquor:
The primary issue addressed is whether the packaging activity, including bottling and labeling of liquor, falls under the purview of service tax as per Section 65(76)(b) of the Finance Act, 2005. The petitioners, who are distillers and retail contractors, argued that bottling and sealing of liquor are integral parts of the manufacturing process and thus should not attract service tax. They contended that these activities are covered under the definition of "manufacture" in Section 2(f) of the Central Excise Act, 1944, which includes processes incidental or ancillary to the completion of a manufactured product. The respondents, including the Central Excise Department, argued that bottling, labeling, and sealing are independent activities and not part of the manufacturing process. They maintained that these activities fall under the definition of "packaging activity" in Section 65(76)(b) and thus attract service tax.

2. Passing on Service Tax Liability:
The second issue was whether the distillers could pass on the service tax liability to the retail contractors. The court noted that service tax is an indirect tax, which can be passed on to the service receiver. The court referenced the decision in T.N. Kalyana Mandapam Association v. Union of India, where it was held that service tax is a tax on services and not on the service provider, allowing the service provider to collect the tax from the client.

Judgment:

On Service Tax Applicability:
The court concluded that the packaging activity, including bottling and labeling, does not constitute a part of the manufacturing process as defined under Section 2(f) of the Central Excise Act, 1944. The court distinguished the activities of packaging from the process of manufacture, noting that the excise duty is levied on manufacture, not on sale. The court found that the packaging activities were clearly services provided under Section 65(76)(b) of the Finance Act, 2005, and thus subject to service tax.

On Passing on the Liability:
The court held that the service tax liability, being an indirect tax, could be passed on by the distillers to the retail contractors. The court clarified that while the Central Excise Department could only recover the service tax from the service provider (distillers), the distillers were entitled to pass on this liability to the retail contractors.

Conclusion:
The court disposed of the writ petitions, holding that the Central Excise Department could recover service tax from the distillers for packaging activities under Section 65(76)(b) of the Finance Act, 2005. It also affirmed that distillers could pass on the service tax liability to the retail contractors. The parties were directed to bear their own costs.

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