Production of goods containing alcohol – “BAS” king in glory – mighty amendments proposed in section 65(19) of the Finance Act, 1994 by Finance (No.2) Bill, 2009
By TIOL News Service
New Delhi, July 2009.

The king of good times is here, well almost!

It was in November 2006 that the CBEC issued a draft circular F.No. 249/1/2006-CX.9 to elicit response from stake holders on taxability of production of alcohol on behalf of the brand owners under Business Auxiliary Service (BAS).

The draft circular languished for a year or so on the CBEC site and one fine day it went missing prompting one to comment as to whether there really was any such circular in the first place.

And then, all of a sudden, the Board came out with a letter F.No. 249/1/2006-CX.4 dated 27.10.2008 modifying the views expressed in its draft Circular and communicating thus –

+ ‘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.

+ 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 sum and substance of this letter is –

+ If the CBU [Contract Bottling Unit] undertakes complete process of manufacture of alcoholic beverage under the ‘contract bottling arrangement’ as described above then such activity would not fall under the taxable service, namely the BAS. However, in case the activity undertaken by the CBU falls short of the definition of manufacture (such as activity of ‘packing’ or ‘labelling’ alone) then such activity would fall within its ambit and would be charged to service tax.

Although this clarification pertained to levy or otherwise of service tax on production of alcoholic beverages on job work basis, the central idea of this clarification was that 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.

Incidentally, at the material time, in the following cases, the CESTAT had ordered for a pre-deposit and we had reported the below mentioned cases –

+  Rubicon Formulations - 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

+  Rubicon Formulations – 2009-TIOL-231-CESTAT-Mum - Service Tax under head BAS - Production of goods containing alcohol and discharging State Excise duty – In W.P 6735 of 2008, Bombay High Court ordering furnishing of Bank Guarantee of Rs.25 lakhs which order complied with - Modification application dismissed as infructuous and matter to be heard finally

+ Midas Care Pharmaceuticals Ltd. [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 .

Recently, we reported another case of Rubicon Formulations [2009-TIOL-962-CESTAT-Mum] wherein although the captioned Board letter dated 27.10.2008 was relied by the appellant, the CESTAT ordered pre-deposit of the entire amount of Service Tax demand and interest.

This is what the Bench held-

“…The Circular explains the exclusion of activity from ‘Business Auxiliary Service’ when the activity amounts to manufacture of a product as described in the said Circular, more particularly, in para 3 thereof.  The learned Consultant has not been able to point out the activity of the applicants to be in consonance with the description of the activity in para 3 of the Circular so as to claim exemption from being classified as ‘Business Auxiliary Service’ within the meaning of the said expression under the said Act.  Prima facie, therefore, we do not find any case having been made out for grant of stay of the impugned order demanding the Service Tax.”

The matter having reached dizzying heights, the Central government feels that an amendment to the definition of Business Auxiliary Services would be the only reasonable solution.

And so, we have the Finance (No.2) Bill, 2009 proposing the following amendments in section 65 of the Finance Act, 1994 -

(1) in clause (19),—

(a) for the portion beginning with the words “but does not include” and ending with the words and figures “Central Excise Act, 1944”, the words “but does not include any activity that amounts to manufacture of excisable goods” shall be substituted;

(b) in the Explanation, after clause (a), the following clauses shall be inserted, namely:—

‘(b) “excisable goods” has the meaning assigned to it in clause (d) of section 2 of the Central Excise Act, 1944;

(c) “manufacture” has the meaning assigned to it in clause (f) of section 2 of the Central Excise Act, 1944;’;

The net effect of the proposed amendments is explained by the Joint Secretary, TRU in his letter D.O. F. No.334/13/2009-TRU dated 6th July, 2009 thus -

“The impact of this change would be that even if a process of manufacture is undertaken for the client, but the resultant product does not fall under the category of excisable goods, such as alcoholic beverages, the service tax would be attracted. Certain other goods which would also fall under BAS on account of the proposed change would be kept outside the tax net by way of exemption notification, to be issued at the appropriate time.”

In the present scheme of things, manufacturers like the ones referred by us would await that elusive exemption notification.

One more thing - will this amendment be not construed as having a prospective effect in view of the Punjab & Haryana High Court decision in Dr. Lal Path Lab Pvt. Ltd. [2007-TIOL-533-HC-P&H-ST].

Whiskey improves with age, but those who drink it don’t – E.C.Mckenzie.