By TIOL News Service

MUMBAI, MAY 27, 2013: THE appellants are owners of different brands of Indian Made Foreign Liquor (IMFL) and engaged in getting the said branded alcoholic beverages manufactured from different contract bottling units (CBUs) on contract basis. The arrangement was made with CBUs through contract agreements. The arrangements provided for manufacture of branded alcoholic beverages by the CBUs with the condition that the same were supplied on sale to the specified distributors of the applicants. The agreement also provided for control of the bank account maintained in the name of the CBUs by the applicants and it was the responsibility of the applicants to provide the funds, know-how, details of raw materials and packaging materials etc. The surplus arising in the operating account of manufacture and sale which represents the profit in the business would go to the brand owner i.e. applicants.

The Anti-Evasion authorities opined that the manufacture and sale of branded beverages amounted to grant of representational right, therefore, a show-cause notice was issued for the period 1.7.2003 to 30.9.2006 for demand of Service Tax of Rs. 13,14,63,643/- under the category of ‘Franchise Service' and also a demand of Rs.16,869/- under the category of ‘Management Consultant Service'.

The CCE, Thane-II upheld the demands along with imposition of penalty and interest and, therefore, the appellant is before the CESTAT.

It is submitted that -

+ on the same activity for the subsequent period in the appellants own case the Commissioner has dropped the demand holding that the activity does not fall under the category of Franchise Services.

+ prior to 16.6.2005 the scope of definition was expanded and under the expanded definition it was held that the activity does not fall under the category of ‘Franchise', therefore, on this count the demands fails.

+ under the contract bottling arrangements, the Contract Bottling Unit (CBU) is the service provider and no service was provided by the appellants to CBU; CBUs are acting as job workers and receive bottling fee/job workers for the services provided by them.

+ Reliance is placed on the CBEC letter/circular dated 27th October 2008 and 30th October 2009 and the decisions in the cases of Franch Express Network (P) Ltd. vs. CST Chennai - (2008-TIOL-1603-CESTAT-MAD), Jetking Information Ltd. v CCE Mumbai - (2006-TIOL-1960-CESTAT-MUM) in this regard and in the matter of the ST demand under ‘Management Consultant Service' the decision in Indian National Shipowner's Association v. Union of India - (2008-TIOL-633-HC-MUM-ST) and also the fact that the service received from law firm in Sri Lanka, being in nature of ‘legal services' the same is not liable to service tax prior to introduction of taxing entry of ‘Legal Consultancy Services' w.e.f. 1.9.2009.

The Revenue representative extracted the portions of the agreement entered into by the appellant with the CBU and submitted that all the parameters of the definition of Franchisee Service as existed on 01.07.2003 or on 16.06.2005 are present in the agreement between the appellant and the alcohol manufacturers and hence the appellant has provided ‘franchise service' as concluded by the adjudicating authority in para 37 of the Order-in-Original.

After going through the terms and conditions of the agreement and the responsibilities of the appellant mentioned therein, the Bench observed -

"9. The terms of the Agreement, CBUs to manufacture the products for and on behalf of the appellant at the plant of CBU using the appellant's equipment. The Agreement clearly states that the CBU has no right to use the intellectual property of the appellant and there is no transfer of any IPR to the CBU from the appellant. The CBU has no claim whatsoever on the rights of the appellant. The nature of transaction between the appellant and CBU indicates that the appellant to use the brand on his own account and there is no representational right given to the bottling unit for the brand name. The commercial interest of the bottling unit is to earn the consideration for bottling or manufacturing the alcoholic beverages. The appellant uses the bottling units for producing the said beverages in their brand names for sale in profit. The said activity has been dealt with by the CBEC in their Circular No. 332/17/09 TRU dated 30.10.2009.

10. After going through the Board's Circular dated 30.10.2009 deals with the situation in this matter and the activity exactly undertaken by the appellant,. In the light of the said Circular it was held that the brand owner/appellants are not required to pay service tax as the surplus/profit earned by the CBU being in nature of profit. Therefore, as clarified by the CBEC through two Circulars, the appellants are not liable to pay service tax.

11. More over, the issue also was dealt by the Commissioner of Service Tax in order-in-original No. 43/STC/BR/10-11 dated 25.02.2011 for the period post 16.5.2005 where the definition of franchise service was made exhaustive. Even in that case also, relying on the Board's clarification dated 30.10.2009, it was held that the appellants are not liable to pay service tax under the category of franchise service. Therefore, the appellants are not liable to pay service tax under the franchise service.

11. For the demand of Management Consultant's service, it is an admitted fact that the same has been received from law firm in Sri Lanka and such services being in nature of ‘Legal Services' not liable to service tax prior to introduction of taxing entry of Legal Consultancy Services. Further, we find that prior to 18.04.2006, the appellants are not liable to pay service tax in reverse charge mechanism as held by the Hon'ble Apex Court in the case of Indian National Ship Owners Association (supra) which has been affirmed by Hon'ble Supreme Court in 2010 (17) STR A57 (S.C.) and CBEC vide Board Circular No. F.Bo.276/8/209-CE 2A dated 26.09.2011. Therefore, for the services received prior to 18.4.2006, the appellants are not liable to pay service tax. As the said issue of liability was settled by the Hob'ble High Court of Bombay in the case of Indian National Ship Owners Association (supra) which was confirmed by the Hon'ble Supreme Court. Therefore, the demand is not sustainable on that count also."

In fine, the order of the CCE, Thane-II was set aside and the appeal was allowed with consequential relief.

In passing:

This is the opening paragraph of the letter F.No.332/17/2009-TRU dated 30/10/2009 addressed to the DGST by the JS (TRU-II) -

"It may be recalled that vide Finance (No.2) Act, 2009, the definition of taxable service, namely, Business Auxiliary Service (BAS) was suitably amended so as to include the manufacture of alcoholic beverages on job work basis. In practice, the brand owners (BOs) of alcoholic beverages get the products (Indian Made Foreign Liquor) manufactured on job work basis under a contract manufacturing arrangement with distilleries having facility to manufacture such beverages. In trade parlance, such job workers/distilleries are called as 'contract bottling units' (CBU). The aforesaid arrangement has come under tax net w.e.f. 01.09.2009."

It is a pity that in spite of such a pithy clarification the CCE, Thane-II chose to go ahead and confirm the demand of Rs.13.14 crores and impose a penalty of Rs.20 Crores. After all, it does not cost much to confirm but a lot to drop a demand.

Time for Liquorices!

(See 2013-TIOL-790-CESTAT-MUM)