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TMI Blog2008 (3) TMI 313X X X X Extracts X X X X X X X X Extracts X X X X ..... y the Division Bench in M/s Vindhyanchal Distilleries Private Ltd. Vs. State of M.P. and others, (2007) 7 VST 197 (MP) has not appropriately considered the decision rendered in Som Distilleries and Breweries Pvt. Ltd. vs. State of M.P. and another, 1997 (1) JLJ 319 and various other aspects which deserve consideration. The Division Bench hearing the writ appeal thought it apposite to refer the matter to a larger bench. The question that has been referred reads as follows: "Whether bottling of liquor amounts to manufacture of liquor or only packaging so as to attract the Service Tax?" 3. It is worth-noting that W.A. No.1524/07 was held to be not maintainable by the Full Bench and in that backdrop, the reference was not answered. These writ petitions being connected with the writ appeal were heard by the Full Bench. 4. Mr. Sumit Nema, learned counsel appearing for the petitioners, submitted that by abundant caution, he had challenged the constitutional validity of the provision but on a keener scrutiny, it is felt by him that the cause of justice would be best subserved if only the apposite interpretative process is adopted to scan the anatomy of the provisions, to arrive at the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Excise Commissioner under the supervision of the Officer-in-Charge of the warehouses and sealing of the bottles is carried out as per specification and labels are affixed on each bottle and thereafter on demand of retail contractors and upon proof of payment into treasury of the issue price recoverable for it, the CS-1 license issues bottles of country spirit to the retail contractor. The 1915 Act contains provisions with regard to the manufacture, supply and sale of liquor. Chapter IV of the 1915 Act deals with the manufacture, possession and sale of liquor. Section 13 of the Act creates a bar on manufacture and collection of intoxicant except under the authority and subject to the terms and conditions of the license in that regard. Section 13(b) prohibits bottling of liquor for sale. Section 15 provides for payment of duty for removal of liquor from the ware houses, distillery or brewery. Section 16 restricts possession of intoxicant beyond the prescribed limit and Section 17 deals with sale of intoxicants with the stipulation that no intoxicant shall be sold except under the authority and subject to the terms and conditions of a license in that regard. Reference has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mandap keepers was upheld on the foundation that it was permissible to lift the service tax on the catering services provided by the mandap keepers and the contention that it did tantamount to tax on land was rejected, and further adverted to the concept 'in relation to' as has been dealt with in the case of Tamil Nadu Kalyana Mandapam Assn.(supra) and thereafter expressed the view as under:- "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 were 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 for any doubt that it was packaging activity, which was clearly a service activity under section 65(76)(b) and not process of manufacture as defined in section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ufacture" takes place as held by the apex Court in Aditya Mills Limited vs. Union of India, (1989) 73 STC 195: (1988) 4 5CC 315. In Collector of Central Excise, Madras vs. Kutty Flusi Doors & Furniture Co. (P) Ltd., (1988) 70 STC 314: AIR 1988 SC 1164,it is held that by conversion of timber logs into sawn timber, no new produce emerged by sawing of timber, therefore, higher excise duty on sawn timber was not leviable." After so holding, the Division Bench referred to the decision rendered in Som Distilleries & Breweries Pvt. Ltd. (supra) and distinguished the same by observing as under: ". . .The decision is of no assistance to the question involved in the present case. It was rendered in the context of M.P. Excise Act, 1915 for imposition of duty and there was no discrimination made while making the classification. Decision was not in context of Central Excise Act. The decision was not with respect to the activity of packaging under section 65(76)(b) and the definition under section 2(f). It was also laid down that bottling fee, which is charged, is not excise duty, though it is an excise revenue for the State and it was within the competence of the State entry under the Constit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r labeling or relabeling of containers including the declaration or alteration of retail sale price on it or adoption of any other treatment on the goods to render the produce marketable to the consumer; and the work 'manufacture' shall be construed accordingly and shall include not only a person who employs hired labour in the production or manufacture of excisable goods but also any person who engages in their production or manufacture on his own account." 13. The learned counsel for the petitioners has laid immense emphasis on sub-clause (i) of Clause 2(f) which deals with "incidental or ancillary to the completion of a manufactured product". The learned counsel submitted that if bottling is treated as incidental or ancillary to the completion of a manufactured product, i.e., the country spirit, indubitably, would come within the sweep of the definition and get out of the net of packaging activity as de fined under Section 65(76b) coming within the noninclusive facet. The learned counsel has submitted that the definition is absolutely clear and there is no ambiguity. In this regard it would be fruitful to refer to two circulars, issued by the Central Board of Excise and Customs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he first Act. Admittedly the scope of the two Acts would be distinct and if the definition is borrowed from the first Act into the second Act having different scope, the same would get disturbed/distorted if the context and scope of the earlier Act is also imported. This is primarily a substitute to writing the entire defining terms in the second Act and not to change the scope of the borrowing Act. Thus just because Central Excise Act does not extend to the manufacture or production of alcoholic beverages meant for human consumption, it cannot be said that the terms 'manufacture' used in Business Auxiliary Service would also not cover the process of making the said product, namely IMFL." (Emphasis supplied) 14. In the aforesaid circular of 2006 it was mentioned that as alcohol beverages are not covered under the Central Excise law the production of beverages would not fall within the meaning of manufacture as conceptualized under Clause (f) of Section 2 of the Central Excise Act. The Board re-examined the matter in detail after receipt of the response and issued the Circular F-No.249/1/2006-CX.4, dated 27-10-2008 which relates to levy of service tax on production of alcoholic bev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... service provider providing services to BO. A doubt has arisen, whether or not the CBU provides a taxable service namely, the Business Auxillary Service (BAS) to BO. This taxable services includes any service pro vided or to be provided in relation to production or processing of goods for, or on behalf of the client. This taxable service however, by definition excludes any activity that amounts to "manufacture" within the meaning of clause (f) of section 2 of the Central Excise Act, 1944 from its ambit. The issue in dispute is whether such activity would be hit by the exclusion clause mentioned above. 3.2 In the draft circular dated November, 2006, it was mentioned that as alcoholic beverages are not covered under central excise law, the production of beverages would not fall within the meaning of manufacture within the meaning of clause (f) of section 2 of the Central Excise Act. Thus, the exclusion clause would not apply to production of non-excisable goods, resulting in its coverage under BAS. However, the matter was reexamined in detail by the Board after receipt of the responses and it has now been concluded that the exclusion would be applicable in the instant case for the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would get disturbed/distorted if the context and scope of the earlier Act is also imported. Thus, just because Central Excise Act does not extend to the manufacture or production of alcoholic beverages meant for human consumption, it cannot be said that the term 'manufacture' used in BAS would also not cover the process of making the said product, namely, alcoholic beverages. [emphasis supplied] 15. If the basic aspect of manufacture as contained in Section 2(f) of the Act is appreciated, it would convey that the "manufacture" would include "any process incidental or ancillary with the completion of manufactured product". The dictionary clause further expands the scope of manufacture to include certain goods which are specified in the Section. The first limb of the inclusive definition of the manufacture under Section 2(f) of the Act has a very wide connotation. As the definition clause lays down an inclusive facet, the term "manufacture" has to be construed in a natural and plain manner and would include any process incidental or ancillary to the completion of a manufactured product. Keeping in view the context in which the term "manufacture" has been used, it would take in its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Keeping in view the aforesaid dictionary clauses and circulars issued by the C.B.E. C. it is quite luminescent that word "manufacture" has to be understood in a broader sense and not to be confined or restricted to the excisable product in the Act. It would include all processes which amount to manufacture whether or not the final product is an excisable product. 19. It will not be out of place to mention that section 65 (76b) while defining refers to the definition of manufacture as contained in Section 2(f) of the Central Excise Act. Thus, in a way it is referral legislation. In this context, we may refer with profit to the decision rendered in Bajya v. Smt.Gopikabai and another, AIR 1978 SC 793 wherein it has been held as under:- "27. Broadly speaking, legislation by referential incorporation falls in two categories: First, where a statute by specific reference incorporates the provisions of another statute as of the time of adoption. Second, where a statute incorporates by general reference the law concerning a particular subject, as a genus. In the case of the former, the subsequent amendments made in the referred statute cannot automatically be read into the adopting stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itions it is mandatory for a distiller to supply country liquor in sealed bottles and not otherwise. 21. It is urged by the learned counsel for the petitioners that the bottling and sealing done is an integral part of the manufacturing process of country liquor and no exclusive packaging service is provided to the retail contractors. The sealing charges which is being recovered from the retail contractors is, in fact, the manufacturing cost and the charge is not for bottling of the country liquor but in includes the cost of the whole manufacturing of country liquor. 22. In this context, we may refer with profit to the decision rendered in Sir Shadilal Distillery and Chemical Works & another v. State of Uttar Pradesh, (1998) 8 SCC 428 wherein the Apex Court after referring to the decision rendered in Khoday Distilleries Ltd. vs. State of Karnataka (1996) 10 SCC 304 has expressed the view that bottling of liquor is an integral part of manufacture and supply thereof. 23. In view of the aforesaid enunciation of law, whether an activity amounts to manufacture or not, it is incumbent to take not of any process which is incidental or ancillary to the completion of the final product whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... works contracts [sub-clause (b)]; hire purchase contracts [sub-clause (c)], catering contracts [sub-clause (e)] by legal fiction to be divisible contracts where the sale element could be isolated and be subjected to sales tax." Thereafter, their Lordships proceeded to state as follows:- "44. Of all the different kinds of composite transactions the drafters of the Forty-sixth Amendment chose three specific situations, a works con tract, a hire purchase contract and a catering contract to bring them within the fiction of a deemed sale. Of these three, the first and third involve a kind of service and sale at the same time. Apart from these two cases where splitting of the service and supply has been constitution ally permitted in sub-clauses (b) and (f) of clause (29-A) of Article 366, there is no other service which has been permitted to be so split. For example, the sub-clauses of Article 366(29-A) do not cover hospital services. Therefore, if during the treatment of a patient in a hospital, he or she is given a pill, can the Sales Tax Authorities tax the transaction as a sale? Doctors, lawyers and other professionals render service in the course of which can it be said that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onstitution Bench has held as under: "7. Circulars and instructions issued by the Board are no doubt binding in law on the authorities under the respective statutes, but when the Supreme Court or the High Court declares the law on the question arising for consideration, it would not be appropriate for the court to direct that the circular should be given effect to and not the view expressed in a decision of this Court or the High Court. So far as the clarifications/circulars issued by the Central Government and of the State Government are concerned they represent merely their understanding of the statutory provisions. They are not binding upon the court. It is for the court to declare what the particular provision of statute says and it is not for the executive. Looked at from another angle, a circular which is contrary to the statutory provisions has really no existence in law." 30. In the case at hand, the circular issued by the Central Board of Excise and Customs is in consonance with the statutory provisions as well as the law laid down by the Apex Court in Sir Shadilal Distillery and Chemical Works (supra). 31. Though we have analysed and stated that we are unable to concur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) The process of manufacture as defined under Section 2(14) of the 1915 Act falls within the ambit and sweep of Section 2(f)(i) of the Central Excise Act, 1944 and, therefore, there can be no levy of service tax on manufacture in view of the clear postulate under Section 65(76b) of the Finance Act, 2005. To elaborate: the fundamental concept of manufacture as engrafted under Section 2(14) of the 1915 Act cannot be regarded as alien to the definition of 'manufacture' under Section 2(f)(i) of the Central Excise Act as has been held by the Division Bench in M/s Vindhyanchal Distilleries Private Ltd. (supra). (viii) The analysis that the bottling of liquor can be independent is not correct, as the liquor cannot be sold without bottling as there is statutory stipulation that the liquor has to be sold in bottles. To further clarify, the container becomes a part of manufacturing process, and that has been so held in Som Distilleries and Breweries Pvt. Ltd. (supra) 32. In view of the aforesaid, we answer the reference on following terms:- "The decision rendered in M/s. Vindhyachal Distilleries (supra) does not state the law correctly inasmuch as it has expressed the opinion that packagi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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