By TIOL News Service

NEW DELHI, AUGUST 05, 2016. THE petitioners have challenged the constitutional validity of Section 66B of the FA, 1994 read with 65B(40) and Section 66D of the FA 1994 as amended by Clause (f) of Section 107 and Clause (2) of Section 109 of FA, 2015 respectively, along with Notification No. 14/2015-ST dated 19 th May 2015, which levies service tax with effect from 1 st June 2015, on persons who manufacture alcoholic liquor for human consumption on job work basis. Also challenged is the constitutional validity of Section 113(A) (1) of the FA, 2009 by which Section 65(19) of the FA 1994 stood amended.

After considering the elaborate submissions, the High Court extracted the impugned sections and amendments made by the FA, 2015 and by tracing the history before and after introduction of the negative list observed -

+ Till 30 th June 2012 on the strength of the mentioned provisions it is possible to levy service tax on this type of work, i.e., manufacture of alcoholic liquors fit for human consumption under the head of business and auxiliary services.

+ The effect of the further changes in 2015 by amendment to the FA was to inter alia bring within the net of service tax, the activity of manufacture 'for another person' of alcoholic liquor for human consumption.

As regards the contention of the petitioners that b y amending Section 65(19) of the FA 1994, the Parliament was seeking to usurp the exclusive jurisdiction of the State Legislature to levy excise duty on the manufacture of alcoholic liquor for human consumption, the High Court considered the ‘Pith and substance doctrine' and observed -

++ The two competing entries in the present case are Entry 51 of List II which according to the Petitioners covers the entire field as far as manufacture of alcoholic liquor or human consumption is concerned, whether it is manufactured by oneself or through another by way of job work. The competing entry, relied upon by the Respondents to sustain the legislation, is Entry 97 of List I which is the residual entry. The question that then arises is whether 'in pith and substance' the provisions under challenge seek to levy service tax on manufacture per se of alcoholic liquor for human consumption, or on the service aspect of the manufacture which is undertaken by one entity for another on job work basis?

Adverting to the decisions in M/s. Hoechst Pharmaceuticals Limited v. State of Bihar & International Tourist Corporation v. State of Haryana, All India Federation of Tax Practitioners v. Union of India whichexplained the 'pith and substance' doctrine, the High Court observed -

++ If the 'pith and substance' doctrine is applied in the instant case, it is evident that while Entry 51 of List II envisages manufacture of alcoholic liquor for consumption it does not contemplate a situation of manufacture of alcoholic liquor by one person or entity for another. Importantly, the taxable event is the manufacture and it is amenable to state excise duty. However, when it comes to manufacture for another, in pith and substance it is a service performed by one for another and cannot therefore fall within the ambit of Entry 51 of List II.

The High Court also observed that the matter could be approached by employing the 'aspect doctrine' as well and by relying upon the decision in Federation of Hotel and Restaurant Association of India v. Union of India, All India Federation of Tax Practitioners v. Union of India added –

++ In the present case, to recapitulate the case of the Respondent, service tax on contract manufacturing of alcoholic beverage for human consumption can be legislated validly by the Parliament with respect to Entry 97 in List I. The case of the Petitioner on the other hand is that Parliament lacks the legislative competence to do so since the activity is essentially one of manufacture of alcoholic liquor for human consumption which is squarely and entirely covered by Entry 51 of the State List.

++ The aspect of performing a service emerges when the activity of manufacture is undertaken by one for another. As explained in Association of Leasing and Finance Services v. Union of India ( supra ) service tax is "a tax on an activity". It was further held that "service is a value added tax. The value addition is on account of the activity that provides value addition." In a situation of 'job work' it is not difficult to envision such value addition as a result of the activity of manufacture being undertaken by one entity for another. It is this aspect of service involved in job work that is sought to be captured here and made amenable to service tax.

++ Therefore while facially it might seem that one and the same activity is made the subject of two imposts, in pith and substance what is made amenable to one of the imposts, in this case service tax, is the 'service' aspect of job work and not the activity of manufacture by an entity for and by itself per se .

++ Consequently, even applying the aspect doctrine it is possible to recognise the legislative competence of Parliament in seeing to bring within the service tax net the activity of job work involved in the manufacture of alcoholic liquor for human consumption.

++ The essential feature as far as Section 65B (44) of the FA 1994 is concerned is the rendering of a service i.e. any activity carried out by a person for another person for consideration. Therefore, a manufacturing activity undertaken by an entity for itself cannot be said to be a service provided to anyone and definitely not to itself. Therefore, that activity of manufacture by the brand owner who is also a licence holder could not be said to be amenable to service tax.

++ However, where manufacturing of alcoholic liquor for human consumption is not manufactured by the entity holding licence/brand owner, but by another entity holding such licence and the cost of manufacture is to be reimbursed by the principal manufacturer/brand owner and that activity by one person for another would therefore be “service” within the meaning of Section 65B (44) of the FA 1994. For these reasons, the challenge to the validity of Section 113(A) (1) of the FA, 2009 by which Section 65(19) of the FA 1994 stood amended and whereby the expression 'business auxiliary service' did not exclude the activity of manufacture of alcoholic liquor for human consumption, when undertaken by one entity for another, is negatived.

++ There is a marked change in the position that the FA 2015 and the amendment it brought about to Section 65B of the FA 1994. Under Section 107 (f) of FA 2015, Clause (40) of Section 65B of FA 1994 would no longer contain the word “alcoholic liquors for human consumption. Section 109 (2) of FA 2015 further substitutes clause (f) of Section 66D of FA 1994 with “services by way of carrying out any process amounting to manufacture or production of goods excluding alcoholic liquor for human consumption.” In other words this commodity was removed from the negative list.

++ By the Notification dated 19 th May 2015 the appointed date on which the abovementioned provisions of FA 2015 would become effective was 1 st June 2015. On that said date the manufacture of alcoholic beverage for human consumption on contract basis has to be viewed as services rendered by one party to another and therefore, amenable to service tax. It is traceable to Entry 97 of List I as it does not fall within the ambit of any of the taxing entries in List II.

++ The act of manufacturing for another by way of job work answers the plain definition of service under Section 66B (44) of the FA which begins with: “'service' means any activity carried out by a person for another for consideration and includes a declared service, but shall not include...". Therefore it is a fallacy to equate the two activities viz., manufacture of such alcoholic liquor by and for oneself and undertaking manufacture for another. The changes brought about in 2015 was intended to capture the latter aspect which is unique to job work for the purposes of levy of service tax.

Conclusion:

++ Court is satisfied that what is sought to be made amenable to service tax is the activity of contract manufacturing of alcoholic liquors fit for human consumption by one entity for another. Such provision of service which is in pith and substance not covered under Entry 51 of List II of the Seventh Schedule to the Constitution of India is certainly amenable to levy of service tax by Parliament which is competent to legislate on that aspect with reference to Entry 97 of List I.

++ Court negatives the challenge to the validity of Section 113(A) (1) of the FA, 2009 by which Section 65(19) of the FA 1994 stood amended. It also negatives the challenge to the validity of Section 66B of the FA 1994 read with 65B(40) and Section 66D of the FA 1994 as amended by Clause (f) of Section 107 and Clause (2) of Section 109 of FA 2015. The validity of the notification appointing the commencement date of the above amendment as 1 st June 2015 as the date on which the above provision would come into force is also, therefore, upheld.

The Writ petitions were dismissed.

(See 2016-TIOL-1646-HC-DEL-ST)