No Service Tax on Alcohol Manufactured by Job Workers for Brand Owners - Stakeholders Win in Board though Lost Prima Facie in Tribunal.
TIOL-DDT 987
07.11.2008
Friday
A little flashback:
1.Our article Beer manufacture and service tax - intaxicating ?
2. 2006-TIOL-268-HC-MP-ST wherein the High Court held that bottling of liquor is liable to Service Tax.
3. TIOL- DDT – 463 05 10 2006 wherein we covered the Board's draft circular.
4. 2008-TIOL-1161-CESTAT-MUM - Production of goods containing alcohol and discharging State Excise duty – Prima facie attracts Service Tax under the head “Business Auxiliary Services” – Tribunal orders pre-deposit of a quarter Crore
5. 2008-TIOL-1295-CESTAT-MUM - Branded Medicaments containing alcohol and duty of excise paid thereon under the Medicinal & Toilet Preparations Act, 1955 – Prima facie applicants are producing goods for the client and are covered under BAS – Tribunal orders pre-deposit of Rs.50 lakhs .
6. TIOL- DDT 915 4.07.2008 - Ignited ideas yet to be extinguished – Intaxication at its worst - Service Tax on Liquor manufacturers – Draft Circular kept in cold storage?
It was in October 2006 that Board had issued a draft circular on taxability of production of alcohol on behalf of the brand owners under Business Auxiliary Service. The draft circular which was issued two years ago remained as draft only. It was even removed from the CBEC website, as maybe they thought everybody had forgotten it. In DDT 915 , it was pointed out that “Nearly 20 months have passed since the draft circular was issued and the second birthday is fast approaching and the draft circular remained as draft so long. What happened to the responses? Has the Board forgotten the Circular? Or is the response from the Liquor lobby so strong that the file has been kept in the cold storage?”
The draft circular was finally removed from the cold storage and a final circular has been issued. The Board, in the final circular (Actually, it is only a letter but not a circular) has taken a diagonally opposite view and clarified that “ manufacture” of alcohol on behalf of Brand Owners is covered under Section 2(f) of the Central Excise Act and hence stands excluded from “Business Auxiliary Service”
The logic behind the above view has been explained as:
- ‘Manufacture' and ‘excisable goods' are two independent concepts and it is not necessary that a process amounting to manufacture within the meaning of section 2(f) should always result in emergence of an excisable goods and vice versa . (What does this vice versa imply? Can any excisable goods emerge without involving the process of manufacture under Central Excise Law?)
- The case of production of alcoholic beverages, which qualifies to be a process amounting to manufacture within the meaning of section 2(f), when read with the relevant judicial pronouncements, because a new product, with a distinct name, character or use; and capable of being marketable, emerges.
- The exclusion provision under the definition of Business Auxiliary Service (under the Finance Act, 1994) makes a reference to a definition of the word ‘manufacture' figuring under another Act (i.e. The Central Excise Act, 1944). It is a settled law that when a definition from an Act is transposed into another Act, it is as if the said definition is physically written into the borrowing Act without any reference to the context of such definition in the Act from which it is being borrowed. 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 Business Auxiliary Service would also not cover the process of making the said product, namely alcoholic beverages.
The confirmed demands have already reached Tribunal and in two cases, the CESTAT ordered pre-deposit having found a prima facie case in favour of the revenue 2008-TIOL-1295-CESTAT-MUM and 2008-TIOL-1161-CESTAT-MUM. Now the advocates can simply place the Board's letter before the CESTAT and laugh their way to the Banks.
It has also been clarified that if the bottling units undertake only packing or labeling alone, such activity would fall within “its ambit” and would be charged to service tax.
It is to be seen that the above activity of packing or labelling was held to be a taxable service under “Packaging Service” under Section 65(76)(b) of the Finance Act 1994 by the MP High Court in 2006-TIOL-268-HC-MP-ST which was also referred to in the Draft Circular. But now, as per the Board's letter, the same is taxable under Business Auxiliary Service. Well, what is the difference? Except for the fact that under BAS the revenue can get tax for the period prior to 16.5.2005, the date from which packaging service became taxable.
It has also been clarified that if the distillery is taken on lease, (may be by the brand owner) the same is taxable under renting of immovable property service and if the Brand owner collects only fee for grant of permission to use the Brand with the property, risk and reward of the product rest with the manufacturer, in such cases, the amount received by the Brand Owner is taxable under “Intellectual Property service”.
Normally wherever Brand Owner allows licensee to use brand name, they also ensure that the products manufactured by the licensee are as per the quality standards of BO- to protect the quality and brand image. To ensure this, the brand owner enters into a License Production Agreements –– and collects amounts for granting representational right to manufacture Brand Owner goods. Such License Production Agreements would fall under the category of Franchisee Service, about which the Board's letter is silent. It is only mentioning about IPR service, not franchisee service.
Para 3.3 of the Board letter introduces a concept called ‘complete manufacture' but the definition under Section 2(f) mentions any process incidental of ancillary to the completion of a manufactured product would also cover under the definition of manufacture. Whether packing into bottles amounts to manufacture or not is again a debatable point. Packaging service (which includes labeling also as per definition) excludes from the purview of service tax if the process amounts to manufacture. It is every likely that the trade will take shelter under this clause arguing that ‘bottling' is an activity ancillary to manufacture (blending) to make the alcoholic liquors marketable.
But again this important issue was clarified in a letter addressed to the Chief Commissioners and the Commissioners. When the draft circular was placed in public domain for eliciting the response from the so called stakeholders, is it not necessary that the information should also be provided to the stakeholders? Instead of a letter, why a public circular was not issued?
The State shall endeavour to bring about prohibition of the consumption except for medicinal purposes of intoxicating drinks and of drugs which are injurious to health – Article 47 of the Constitution.
CBEC Letter F.No . 249/1/2006- CX 4 dated 27th October 2008
DGFT announces new DEPB rates
DGFT has announced new DEPB rates.
1. The rates of DEPB specified in book shall not be applicable to export of a commodity or product if such commodity or product is:-
a. Manufactured partly or wholly in a warehouse under Section 65 of the Customs Act, 1962 (52 of 1962);
b. Manufacture and/or exported in discharge of export obligation against an Advance Autorisation including Advance Authorisation for Annual Requirement or exported under DFIA Scheme of the relevant Foreign Trade Policy;
c. Manufacture and/or exported by a unit licenced as 100% Export Oriented Unit in terms of the provisions of the relevant Foreign Trade Policy;
d. Manufactured and /or exported by any of the units situated in Free Trade Zones/Export Processing Zone/Special Economic Zones/ EHTP Scheme;
e. Exports of goods of foreign origin, unless the goods have been manufactured or processed or on which similar operations have been carried out in India;
f. Exports made under paragraph 2.35 and 2.36 of the Foreign Trade Policy.
2. The DEPB rate and the value cap shall be applicable as existing on the date of order of “let export” by the Customs.
3. The value cap, wherever existing, shall be with reference to the FOB value of exports. The DEPB rates shall be applied on the FOB value or value cap whichever is lower. For example, if the FOB value is Rs.500 /- per piece, and the value cap is Rs.300 /- per piece, the DEPB rate shall be applied on Rs.300 /-.
4. Wherever any specific rate exists for a particular item under DEPB rate list as given in this book, the items shall not be covered under any generic description of the DEPB rate list.
5. The DEPB rate aims to neutralize the incidence of duty on the inputs used in the export product. Therefore, the DEPB rates, as given in this book refer to normally tradable/exportable product. Items such as Gold Nibs, Gold Pen, Gold watches etc. though covered under the generic description of writing instructions, components of writing instruments and watches are thus not eligible for benefit under the DEPB scheme.
6. The DEPB rates given for various galvanized Engineering product shall cover non galvanised products and vice-a-versa.
7. The DEPB rate given for various types of garments do not cover Silk as well as Woolen garments unless specifically mentioned in the DEPB description.
8. Portable product at S.No.239 , 240,241,242,243 and 286 of Product Group: Engineering (Product Code 61) exported in the form of incomplete CKD/ SKD Kit, but consisting of (i) Engine (ii) Chassis (iii) Gear Box (iv) Transmission Assembly system (v) Axle (Front & Rear) and (vi) Suspension System or Body/Cab or both, shall be treated at par with complete CKD/ SKD Kit for the purpose of relevant DEPB benefits.
9. The DEPB rate for formulation consisting of more than one bulk drug would be calculated as per provisions of Policy Circular No.20 dated 31 st July, 2000.
10. Wherever the export of resultant product in completely built form is allowed under DEPB , the CKD/ SKD export of such product shall also be allowed under DEPB .
11. DEPB benefit would also be admissible on the export of composite product including assembled product having more than one constituent items for which DEPB rates are individually fixed. In such cases, the DEPB entitlement would be restricted to the lowest of the rate applicable to the constituent items, ignoring the rate of the constituent item(s) having weight less than 5% of the total net weight of such product. However, no DEPB benefit would be admissible on the exportof such product, if constituent item(s) is weighing more than 5% of the total net weight (of the product) and does not have any DEPB rate fixed.
The exporters shall declare in the shipping bill the following details also for claiming DEPB benefit on the export of such product:
i. Description of the composite product including the assembled product, alongwith its total net weight.
ii. Description of all the constitute item(s) of such products which attract a DEPB rate with their respective DEPB Nos. and their credit rate alongwith total weight of such constituent (s).
iii. Description and combined total weight of those constituent item(s) which have no DEPB rate in the schedule.
12. DEPB benefit would be available on the export of products having extraneous material upto 5% by weight. In such cases, extraneous material upto 5% shall be ignored and the DEPB rate as notified for that export product shall be allowed.
DGFT PUBLIC NOTICE NO.102 (RE-2008) /2004-2009 –Dated: November 05, 2008
Buying immovable property by foreigners – Govt clarifies
It has come to the notice of the Central Government that foreign nationals are buying immovable property illegally in some parts of the country, particularly in Goa, which has raised concerns.
Many organisations and social groups have also made representations to the Central Government expressing their serious concerns in this regard.
It has also been observed that foreign nationals coming to India and staying beyond 182 days on a tourist or other visa meant for a certain period are illegally acquiring immovable property in India in violation of the rules and regulations under FEMA.
As per the provisions contained in Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulation 21/2000 (Notification No. 21/2000- RB dated the 3rd May, 2000), an Indian citizen resident outside India and a Person of Indian Origin resident outside India may acquire immovable property in India other than agricultural land, plantation or a farm house.
A foreign company which has established a Branch Office or other place of business in India under the provisions of Foreign Exchange Management (Establishment in India of Branch or Office or Other Place of Business) Regulations, 2000 (FEMA 22/2000- RB dated the 3rd May, 2000) can acquire immovable property in India which is necessary for or incidental to carrying on such activity, subject to the conditions stipulated in Regulation 5 of Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2000 (Notification No. 21/2000- RB dated the 3rd May, 2000).
Apart from above, a foreign national who is residing in India for more than 182 days during the course of the preceding financial year for taking up employment or carrying on business / vocation or for any other purpose indicating his intention to stay for an uncertain period can acquire immovable property in India as he would be a ‘person resident in India' as per section 2(v) of FEMA, 1999.
To be treated as a person resident in India under FEMA, a person has not only to satisfy the condition of the period of stay (being more than 182 days during the course of preceding financial year) but also his purpose of stay as well as the type of Indian visa granted to him to clearly indicate the intention to stay in India for an uncertain period. In this regard, to be eligible, the intention to stay has to be unambiguously established with supporting documentation including visa.
Jurisprudentiol– Monday's cases
All Tax (and some not so taxing) Laws
Writ petition against orders of pre- deposit clearly maintainable - Delhi High Court
The relief under Article 226 can be refused on the ground of existence of alternative remedy only if that alternative remedy is effective and equally efficacious. Evaluation of circumstances which warrant waiver of pre-deposit would fall within the purview of Article 226 of the Constitution of India.
Income Tax
Research and development for developing enhanced and improvised versions of optical transmission telecom equipments – Revenue Expenditure – ITAT
IN an interesting case before the Tribunal, the issue was whether project development expenses incurred in development of a specified product as prototype would be eligible as either revenue expenditure or capital expenditure. The Tribunal after deliberating on the facts of the case and the relevant case laws overturned the decisions of the lower authorities and held that such expenses are revenue in nature in terms of s. 37 (1) of the Act. It also held that such expenses are available as deduction in terms of s. 35 (1) (iv) of the Act even if they are held to be capital in nature by agreeing with the alternative submissions of the appellant's authorized representative.
Customs
Atlas and Globes showing incorrect external boundaries of India are prohibited goods and hence have to be absolutely confiscated without any option for re-export – As revised instructions were not communicated through a Public Notice, importer cannot be saddled with penalty – Tribunal
THE appellants imported 750 pieces of Atlas (printed books) and 320 pieces of Globes totally valued at nearly Rs.6 lakhs . On examination of the said goods, it was found by the Customs authorities that the external boundaries of India on the maps in the Atlas and globes being imported were not represented correctly.
See our columns Monday for the judgements
Until Monday with more DDT
Have a nice Weekend.
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