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TMI Blog2009 (8) TMI 50X X X X Extracts X X X X X X X X Extracts X X X X ..... lt;!--?xml:namespace prefix = st2 /--> FERDINO I. REBELLO J.H. BHATIA, JJ. Mr. Vikram Nankani with Mr. Madhur R. Baya for the Appellants. Mr. A.S. Rao with Mr. Rajinder Kumar for the Respondents. Mr. V. Sridharan with Mr. Prakash Shah, Mr. J.H. Motwani, Mr. Bharat Raichandani and Mr. Jas Sanghvi i/by PDS Legal for Intervener. [Judgment per FERDINO I. REBELLO, J.]. - The Appeal was admitted on the following questions : (a)Whether services of advertising and marketing procured by the Appellants in respect of advertisements for aerated waters are covered by the definition of the words input services as defined in Rule 2(1)of the CENVAT Credit Rules, 2004, when admittedly the Appellants manufacture concentrates exclusively used for the manufacture of the respective aerated waters which are advertised by the Appellants ? (b) Whether the advertisement or sales promotion of aerated waters undertaken by manufacturer of concentrate is covered by the inclusive part of the definition of input service contained in Rule 2(1) of the CENVAT Credit Rules, 2004? 2. The main question which is therefore, required to be considered, in the present ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The concentrate is sold by the Appellants to bottling companies, who in turn sell the aerated beverages manufactured from the concentrates to distributors and who in turn sell it to retailers for the ultimate sale to the consumer. 5. The advertisement and sales promotion activities including market research are undertaken by the Appellant. There are different types and forms of advertisement, in all forms of media print, television, radio, etc. These advertisements show that: (i) they carry the brand name; (ii) the bottle of aerated water may or may not feature in these print / outdoor advertisements, though they would feature in television advertisements. (iii) some advertisements are restricted only to the brand name alongwith promotion of some other allied or connected service/activity. The brand name and trade mark is licensed in favour of the Appellants by THE COCA-COLA COMPANY, USA. 6. On behalf of the Appellant learned counsel submits that the definition of input service in Rule 2(l) contains the words means . and includes . When the definition clause contains the words means and includes , the words following the expression includes have t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the Appellants are therefore, eligible under clause (ii) as well as by virtue of the extended part of the definition of Rule 2(l) to avail of the credit to pay duty. 10. On behalf of the Intervener the learned counsel submits that as under : The expression includes enhances the scope of definition of input services . Similarly expression such as is illustrative and not exhaustive. The word business is to be understood as s continuous activity and not confined or restricted to mere manufacture of the product. Activities in relation to the business cover all activities that are related to the functioning of the business. Words relating further widens the scope of expression activities relating to business. The learned counsel has taken us through various material including Finance Minister's Speech, Central Credit Rules, 2004 and various press notes issued under CENVAT Rules, the dictionary meaning of various expressions and various judicial pronouncements including of the House of Lords. It is submitted that service tax like CENVAT is basically value added tax which is operative through credit mechanism. It is consumption tax which ultimately must be borne b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng in mind the mean cenvat rate, I propose to enhance the rate of service tax from 8% to 10%. On the premise that credit would be available of service tax paid on input service, rate of service tax on services was increased from 8 to 10% with effect from 10.09.2004. Accordingly, assessee like Pepsi were reimbursing service tax to their service providers at the rate of 10%, instead of earlier rate of 8% with effect from 10.09.2004, on services like advertising agency service, broadcasting agency service etc. 13. Draft Cenvat Credit Rules, 2004 circulated by Ministry of Finance, New Delhi. The draft Cenvat Credit Rules was circulated by the Ministry of Finance inviting comments from the trade and industry. The said draft rules defined the term input service as under: (g1) Input service means any service (i) Received and consumed by a service provider in relation to providing an output service; or (ii) Used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products from the place of removal; Explanation: Input service includes services used in relation to setting up a factory, p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The advertisement of soft drink enhances the marketability of Concentrate. (vi) The concentrate is manufactured by the Appellants for sale exclusively to the bottling companies who, in turn manufacture the soft drinks. The bottling companies, in their turn, buy the concentrate exclusively from the Appellants. The consumption of concentrate vis-a-vis the soft drinks is in a theoretically defined proportion. As there is no sale of the concentrate by the Appellants to any consumer other than the bottling companies, the singular manner of enhancing the marketability and demand for the Appellants products, therefore, is by enhancing the market for the soft drinks, for which purpose alone, the Appellant undertakes the activities such as market research and advertising. 16. According to the Applicant, advertisement of aerated water is integrally connected with manufacture and sale of concentrate. The concentrate/base is an essential intermediate product for the manufacture of relevant aerated water. The final product aerated water is simply obtained by diluting the concentrate with water, sugar and carbon dioxide. Essentially the flavour, taste etc. are derived from the concentra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry catering to their respective market to advertise the brand name/produce at a national level. Thus to ensure uniformity and high quality advertisement, the advertisement is always done from one centralized location to cover the entire country and to maintain brand image, uniformity etc. In the instant case the concentrate manufacturer is also having bottling plants of its own in the form of a separate subsidiary company. 18A. Arguments were also advanced in respect of market research and other allied activities. However, no question was formulated on that count for our consideration. It is true as the subsequent discussion will show that the same test applicable to advertisements may have to be applied, but in the absence of a question formulated on that count, we decline to answer that issue. 19. To answer the questions framed we shall have first to answer as, what constitutes manufacturing cost? The Supreme Court in Union of India Vs. Bombay Tyres International [1983 (14) ELT 1896 (SC)] has held that all elements given to enrich the value of the excisable goods and contribute to its marketability, must form part of the manufacturing cost of the goods. The relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a. In terms of Section 3 of the Central Excise Act which is the charging section, duty of excise is leviable on all excisable goods manufactured in India at the rate specified in the Central Excise Tariff. b. In terms of Section 4 of the Central Excise Act, where the rate of duty specified in the tariff is based on value, then such value is the sale price paid or payable for the excisable goods. c. In the case of Bombay Tyre International, the Supreme Court was considering the challenge to the levy of Central Excise duty on the basis of sale price. The assessees contended that the levy was on the manufacture of the goods and therefore the levy of Central Excise duty should be only on manufacturing cost and manufacturing profit. However, the Supreme Court held that even though the levy was on the manufacture, the measure can be with reference to the sale price. d. In this context, the Supreme Court observed that the price of article is related to its value and into that value several components are poured including those which have enriched its value and give to the article its marketability in the trade. Accordingly, the Supreme Court held that the expenses for marketi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the term means and `includes . These expression must be understood as now judicially recognized. In Regional Director V/s High Land Coffee Works 1991 (3) SCC 617, the Hon'ble Supreme Court has held as under: The word include in the statutory definition is generally used to enlarge the meaning of the preceding words and it is by way of extension, and not with restriction. The word include is very generally used in interpretation clauses in order to enlarge the meaning of words or phrases occurring in the body of the statute; and when it is so used, these words or phrases must be construed as comprehending, not only such things as they signify according to their natural import but also those things which the interpretation clause declares that they shall include. [See ( i ) Stroud's Judicial Dictionary , 5th edn. Vol. 3, p. 1263 and (ii) C.I.T. v. Taj Mahal Hotel 1 , ( iii) State of Bombay v. Hospital Mazdoor Sabha. This has been reiterated in C.I.T. Vs. T.T.K. Health Care Ltd . (2007) 11 SCC 796. In M/s. Mahalakshmi Oil Mills Vs. State of Andhra Pradesh , AIR 1989 Supreme Court 335, the Court dealing with the expression means and includes observed as u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its scope would be extended to bring within it matters, which in its ordinary meaning may or may not comprise. Therefore, the use of the word means followed by the word includes in Section 2(bb) of the ID Act is clearly indicative of the legislative intent to make the definition exhaustive and would cover only those banking companies which fall within the purview of the definition and no other. Considering these judicial pronouncements, it is clear that the expression means and includes is exhaustive. By the word includes services which may otherwise have not come within the ambit of the definition clause are included and by the words means these are made exhaustive. 24. The next expression to be considered from the definition is such as . A few dictionary meanings of the term such as are reproduced: Concise Oxford Dictionary, 'Such as' means for example or of a kind that; Chambers Dictionary, 'Such as' means for example: In Good Year India Ltd V/s Collector of Customs 1997 (95) ELT 450 the Supreme Court observed as under: The words such as stainless steel, nickel monel, incoloy, hastelloy in sub-heading (2) are only illustrative of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore, particularly in fiscal statutes is of wide import. 26. The definition of input service employs the phrase activity relating to business. The words relating to further widens the scope of the expression activities relating to business. This is in view of following observations of Supreme Court in Doypack Systems (P) Limited Vs Union of India 1988 (36) ELT 201 (SC), interpreting the expression in relation to: 48. The expression in relation to (so also pertaining 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 an indirect significance depending on the context, see State Wakf Board v. Abdul Aziz (A.I.R. 1968 Madras 79, 81 paragraphs 8 and 10,following and approving Nitai Charan Bagchi v. Suresh Chandra Paul (66 C.W.N. 767), Shyam Lal v. M. Shayamlal (A.I.R. 1933 All. 649) and 76 Corpus Juris Secundum 621. Assuming that the investments in shares and in lands do not form part of the undertakings but are different subject matters, even then these would be brought within the purview of the vesting by reason of the above expressions. In this conne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purpose of the trade of the subject making the return and it does not matter that this payment may inure to the benefit of a third party. 29. The above test was followed by the Hon'ble Allahabad High Court in Additional Commissioner of Income Tax V/s Symonds Distributors (P) Ltd. (1977) 108 ITR 947 (ALL) wherein the dispute was that if a sales company voluntarily reduced its own commission which it received from the manufacturing company so as to support the manufacturing unit, whether it amounts to a business expenditure? The claim was disallowed by ITO and AAC on appeal. The tribunal allowed the expenditure on the finding that the same has incurred wholly and exclusively for the purpose of assessee's business out of commercial expediency. This view was upheld by the Hon'ble High Court observing as under: A sum of money expended, not of necessity and with a view to a direct and immediate benefit to the36 trade, but voluntarily and on the grounds of commercial expediency, and in order indirectly to facilitate the carrying on of the business, may yet be expended wholly and exclusively for the purposes of the trade. This test has been quoted with approval and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a wide meaning for the purposes of value added tax that it is capable of embracing everything which a taxable person does in the course or furtherance of a business carried on by him which is done for a consideration. The name or description which one might apply to the service is immaterial, because the concept does not all for that kind of analysis. The service is that which is done in return for the consideration. As one moves down the chain of supply, each taxable person receives a service when another taxable person does something for him in the course or furtherance of a business carried on by that other person for which he takes a consideration in return. Questions such as who benefits from the service or who is the consumer of it are not helpful. The answers are likely to differ according to the interest which various people may have in the transaction. The matter has to be looked at from the standpoint of the person who is claiming the deduction by way of input tax. Was something being done for him for which, in the course or furtherance of a business carried on by him, he has had to pay a consideration which has attracted value added tax? The fact that someone else in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... costs but a necessary cost of and exclusively attributable to the sale of a Redrow home to that same purchaser. If the sale of the Redrow home were an exempt supply and not merely zero-rated, the agent's fees would not be deductible for the reasons given by the Court of Justice in B.L.P. Group Plc. v. Customs and Excise Commissioners (Case C-4/94) [1996] 1 W.L.R. 174. I would allow the appeal and affirm the decision of the value added tax tribunal. 31. CBEC by Circular No. 80/10/2004-ST dated 17.09.2004, inter alia, clarified as under: Service Tax like CENVAT is basically a value added tax which is operated through credit mechanism. 32. CBEC Circular No. 56/5/2003-S.T. dated 25.04.2003 issued in the context of export of services, clarified that service tax is a consumption tax. Relevant extract is reproduced herewith as under (remaining paragraphs in context of export of services are not quoted here): I am directed to clarify that the Service Tax is destination based consumption tax and it is not applicable on export of services. 32A . Name of tax was rechristened as Cenvat w.e.f. 12.05.2000. Section 3 of Central Excise Act, 1944 as it stood before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lue added tax. 8. As stated above, service tax is VAT. Just as excise duty is a tax on value addition on goods, service tax is on value addition by rendition of services. Therefore, for our understanding, broadly services fall into two categories, namely, property based services and performance based services. Property based services cover service providers such as architects, interior designers, real estate agents, construction services, mandapwalas etc. Performance based services are services provided by service providers like stockbrokers, practising chartered accountants, practising cost accountants, security agencies, tour operators, event managers, travel agents etc.. 20. On the basis of the above discussion, it is clear that service tax is VAT which in turn is both a general tax as well as destination based consumption tax leviable on services provided within the country. (emphasis supplied) 34. It is therefore, clear that the burden of service tax must be borne by the ultimate consumer and not by any intermediary i.e. manufacturer or service provider. In order to avoid the cascading effect, the benefit of cenvat credit on input stage goods and services must be or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ose the tax at all stages and normally allow immediate deduction of taxes on purchases by all but the final consumer. 2. These features give value added taxes their main economic characteristic, that of neutrality. The full right to deduction of input tax through the supply chain, with the exception of the final consumer, ensures the neutrality of the tax, whatever the nature of the product, the structure of the distribution chain and the technical means used for its delivery (stores, physical delivery, Internet). [Emphasis supplied] 36. Though India is not a signatory to OECD Model, it adopts the same model of destination based consumption tax rule as is clear from the aforesaid clarifications issued by the CBEC as well as the law laid down by the Hon'ble Supreme Court in All India Federation of Tax Practioners's case (supra). The basic approach adopted by India is to tax services on the destination cum consumption principle, which is in line with international norms. Therefore, OECD Guidelines can be safely considered. 37. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... associated directly or indirectly in relation to manufacture of final products and transportation of final products upto the place of removal. This would follow from the observation of the Supreme Court in Kerala State Cooperative Marketing Federation Ltd. and Ors. Vs. Commissioner of Income-tax 1998 (5) SCC 48, which is as under: 7. We may notice that the provision is introduced with a view to encouraging and promoting growth of co-operative sector in the economic life of the country and in pursuance of the declared policy of the Government. The correct way of reading the different heads of exemption enumerated in the section would be to treat each as a separate and distinct head of exemption. Whenever a question arises as to whether any particular category of an income of a co-operative society is exempt from tax what has to be seen is whether income fell within any of the several heads of exemption. If it fell within any one head of exemption, it would be free from tax notwithstanding that the conditions of another head of exemption are not satisfied and such income is not free from tax under that head of exemption. [Emphasis supplied] 40. In Share Medical Care V ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was no dispute that product in question was a optical time domain reflectometer. Assessee claimed the benefit of Sl. No. 53 of Notification No.96/61-Cus. CESTAT held that product is squarely and more specifically covered by Notification No. 59/88-Cus and rejected the assessee's contention. CESTAT held as under: 9. We have carefully considered the matter. We find that there is no dispute and it is an admitted position that the goods imported were optical time domain reflectometer. Optical time domain reflectometer are specifically described in Notification No.. 59/88-Cus., dt. 1.3.1988 which provided exemption to the goods specified in the Table annexed to that Notification No. 59/88-Cus. which was falling under Chapters 84, 85 or 90 of the Customs Tariff. The exemption was to the extent of the duty as was in excess of the amount calculated at the rate of 55% ad valorem. Subsequently, another Notification No. 96/91-Cus., dt. 25.7.1991 was issued which exempted the goods falling within the Chapters 82, 84, 85 and 90 of the Customs Tariff which was used in the electronic industries. The exemption available was to the extent of duty which was in excess of the amount calculated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ication is general in its terms and the other notification is more specific to the goods . 42. Explanatory note by HSN to Heading 21.06 proves the integral link between concentrate manufactured by the assessee and the beverage (aerated water) manufactured by the bottler from it. The concentrate manufactured by the assessee in question has been classified and assessed to Cenvat (excise duty) under heading 21.06 by the Schedule to Central Excise Tariff Act, 1985. That heading is identical to heading 21.06 of organised system of nomenclature issued by WCO. In fact our Excise Tariff is based on HSN. Therefore, Supreme Court has repeatedly emphasized that the Explanatory Notes of HSN are are valuable material for understanding the scope of various headings in the Central Excise Tariff. The relevant extract of the Explanatory Note of HSN of Heading 21.06 is as under:- 21.06 FOOD PREPARATIONS NOT ELSEWHERE SPECIFIED OR INCLUDED. The heading includes, inter alia : (1) .. (2) ., .. (3) (4) (5) (6) (7) Non-alcoholic or alcoholic preparations (not based on odoriferous substances) of a kind used in the manufacture of various non-alcoholic or alc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 44. Having thus arrived at the conclusion on the meaning of the expression of input services and that manufacturer can avail of the credit of the services tax paid by him for payment of CENVAT duty, the question referred for our consideration will have to be answered as under : Question (a) is answered in the affirmative in favour of the assessee and against Revenue and question (b) again answered in the affirmative in favour of the assessee and against revenue. In the light of the above, the impugned order of the Commissioner, Central Excise, Bombay III dated 31 st July, 2006 and the order of the Tribunal dated 16 th April, 2007 are set aside, the matter is restored to the file of the Commissioner, Central Excise to pass appropriate order in the light of what w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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