Some Recent Judgments

•     Department’s appeal against the CESTAT Misc. Order No. ST/85/2008 (PB) dated 27-6-2008 in the case of Hindustan Zinc Ltd. v. Commissioner, 2008 (11) STR 338 (Tri.-LB) was dismissed with the comment ‘no merit’. In view of this, the Larger Bench’s decision that recipient of service provided from outside India or by a non-resident having no office in India is not liable to pay service tax prior to 1-1-2005. (Detailed analysis of the decision of the Larger Bench was made in September 2008 issue of BCAJ).

    2. Explanation widening tax net is not retrospective for operation :

    UOI v. Martin Lottery Agencies Ltd., 2009 (14) STR 593

•     In the definition of business auxiliary service u/s.65(19) of the Finance Act, 1994, an explanation was inserted with effect from 16-5-2008 whereby promotion and marketing of lottery tickets was made exigible to service tax. However, the present appeal arose from a judgment and order dated 18-9-2007 (period prior to insertion of the explanation) passed by the Sikkim High Court in a writ petition filed by the respondent challenging legality wherein the High Court had not upheld the levy under the category of business auxiliary service. Service tax was sought to be recovered from the respondent agent considering the service in relation to promotion/marketing of lotteries as business auxiliary service.

    The core question that the Court had to consider was whether the explanation inserted post-decision of the Sikkim High Court was clarificatory or declaratory so as to be interpreted as having retrospective effect and retroactive operation. Referring to and relying on the decisions of several High Courts and the Supreme Court, the Court ruled that by reason of an explanation, a substantive law may be introduced. The Parliament is entitled to bring new concepts of imposition of tax and also entitled to raise legal fiction. However, when substantive law is introduced, it will have no retrospective effect. For the said purpose, an expression like ‘for the removal of doubt’ is not conclusive. The Court also stated that constitutional validity was not examined by them. However, holding that explanation was not clarificatory/declaratory, the High Court’s decision was upheld opining categorically that service tax, if any, would be payable only and with effect from May 2008, i.e. prospectively on the insertion of explanation.

II. High Court :

    3. Clearing and Forwarding Agent :

    CCE v. Kulcip Medicine Pvt. Ltd., 2009 (14) STR 608 (P & H)

    â In this case of Revenue’s appeal, the short question relates to whether or not both ‘clearing’ and ‘forwarding’ are necessary to be covered within the scope of the definition of clearing and forwarding services as the assessee was engaged in the activity of handling and distribution of products of manufacturer and thus not engaged in clearing activity i.e. he dealt with already cleared goods from the factory. The Court in this case noted and approved the decision in the case of M/s. Mahavir Generics v. CCE, Bangalore 2006 (3) STR 276 (Tri.). According to the Court, the word ‘and’ used after the word ‘clearing’ and before the word ‘forwarding’ in the definition provided in S. 65(105)(j) of the Finance Act, 1994 has to be understood in a conjunctive sense and not disjunctive. According to the Court, if the word ‘and’ was read as ‘or’, then it would amount to doing violence to the simple language used by the legislature which cannot be imputed to ignorance of English language. The Court thus expressed its inability to accept the view taken by the Larger Bench in the case of Medpro Pharma Pvt. Ltd. v. CCE, 2006 (3) STR 355 (Tri.-LB) and overruled the same. Further, stressing on the binding nature of the Board circular, the Court observed that they were meant for adoption for the purpose of bringing uniformity and on that count also, the expression ‘clearing and forwarding agent’ was interpreted in the light of the Board Circular dated 20-4-2002 issued in this regard. The Court also observed and the revenue agreed that the department had not appealed against the decision in the case of Mahavir Generics and as such it had attained finality. Thus, considering the dealer not as a clearing and forwarding agent, the revenue’s appeal was dismissed.

    4. Bottling of liquor considered manufacturing and not liable for service tax :

    SOM Distilleries Pvt. Ltd. & Ors. v. UOI & Ors., 2009 TIOL 292 HC – MP – ST – LB

•     Question referred from Divisional Bench, whether bottling of liquor amounts to ‘manufacture’ (as defined by clause (f) of S. 2 of the Central Excise Act, 1944) of liquor or only packaging so as to attract Service Tax u/s.65(76b) of the Finance Act, 1994.

    The Court, overruling the decision of the division bench in M/s. Vindhyanchal Distilleries Pvt. Ltd. v. State of M.P. and Anr., (2007) 7 VST 197 (MP) held that packaging and bottling of liquor falls within the ambit of ‘manufacture’ and does not attract service tax u/s.65(76B) of the Finance Act, because:

•      S. 65(76b) by referral legislation excludes from liability any process amounting to ‘manufacture’ as defined in clause (f) of S. 2 of the Central Excise Act, 1944.

• The question as to whether exclusion clauses goods/processes would apply to non-excisable goods (as even though they fall within the definition of ‘manufacture’, alcoholic beverages are excluded from excise duty by Entry No. 92C in list 1 of Schedule VII to the Constitution of India) has now been settled by Cir. F.No. 249/1/2006-CX.4, dated 27th October 2008 to conclude that ‘manufacturing process’ is a term which must be understood distinctly and it is not necessary for every process amounting to manufacture to result in the emergence of an excisable good.

• M/s. Vindhyanchal Distilleries (supra) was incorrectly decided in that the question of whether tax is exigible in respect of a transaction is to be determined on the terms of the contract alone, and not from the invoice issued by the person entitled to receive money under the contract. [Arun Electrics Bombay v. Commissioner of Sales Tax, (1966) 17 STC 576].

• Further, that the process of bottling can be regarded as independent (as in M/s. Vindhyanchal Distilleries) is not correct, especially in view of the statutory requirement that liquor must be sold in sealed bottles. Therefore, packaging and bottling of liquor is a part of the manufacturing process and because it falls within the ambit of clause (f) of S. 2 of the Central Excise Act, 1944, it is excluded from service tax liability in view of the exclusionary facet of the definition contained in S. 65(76b) of the Finance Act, 1994.

III. Tribunal:
5. CENVAT Credit:

(i) Outward transportation from place of removal is input service — A Larger Bench decision:

M/s. ABB Ltd. & Others v. CCE & ST & Others, 2009 TIOL 830 CESTAT-Bang. (Tri.-LB)

The Larger Bench made a detailed analysis of the definition of ‘input service’ in terms of Rule 2(1). The definition, according to the Tribunal could be conveniently divided into the following 5 categories:

(a) Any service used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products,

(b) Any service used by the manufacturer whether directly or indirectly, in or in relation to clearance of final products from the place of removal,

(c) Services used in relation to setting up, modernisation, renovation or repairs of a factory, or an office relating to such factory,    

d) Services used in relation to advertisement or sales promotion, market research, storage upto the place of removal, procurement of inputs,

e) Services used in relation to activities relating to business and outward transportation upto the place of removal

• The Tribunal noted that each of the limbs is an independent benefit/ concession and therefore even if an assessee satisfies one of the limbs, the credit is admissible. To illustrate this, it is stated that a service in relation to renovation or repair of factory will be allowed as credit as it is a service in relation to setting up of modernisation even if it is assumed as an activity not relating to business. Various decisions were cited and discussed in support of this contention which inter alia included Share Med.ical Care v. UOI, 2007 (2009 ELT 321 (SC), HCL Ltd. v. Collector, 2001 (130) ELT 405 (SC), Indian Petro Chemicals, 1997 (92) ELT 13 (SC).

• The Tribunal noted that the definition of ‘input service’ includes the expression ‘activity relating to business’. The term ‘business’ is of wide import and the words ‘in relation to’ further widen the scope. The words are of comprehensiveness, which may have direct, as well as indirect significance. It is equivalent to or synonymous with ‘concerning with’ or ‘pertaining to’ which are expressions of expansion and not of contractions. Further, there is no qualification to the words’ activities relating to business’. The words ‘such as’ in the definition also are purely illustrative.

• Transportation of goods to customer’s premises is an activity relating to business and an integral part of manufacturing business. The Tribunal further noted that if the activities like advertising and market research are eligible to credit, the service ensuring physical availability of goods i.e. transportation should also be eligible for credit.

• The Tribunal stated that for admissibility of instant credit, there is no requirement that the cost of freight should enter the transaction value of the manufactured goods. Meaning thereby that credit cannot be automatically disallowed in cases where freight does not form part of the transaction value. Referring to the case of All India Federation of Tax Practitioners v. UOI, 2007 (7) STR 635 (SC), it stated that service tax is a value added tax in the sense that it is on commercial activities and not a charge on the business but a tax on value addition by rendition of service.

• An additional observation that the Tribunal has made in this case is that the dispute in the case bemg that of admissibility of credit of service tax on GTA service and not one of valuation of excisable goods u/s.4 of the Central Excise Act, 1944 and therefore, the two issues viz. ‘valuation’ and ‘CENVAT Credit’ are independent and have no relevance with each other. In this frame of reference the relevant guidelines issued by OECD were discussed. Citing the decision of All India Federation of Tax Practitioners (supra), it stated that revenue’s submission that no CENVAT credit is available if the nature of service does not form part of value of goods subject to excise duty, is against the princip,l,e laid down in the said case of All India Federation of Tax Practitioners and the OECD guidelines, as service tax and excise duty are consumption taxes to be borne by the consumer. If credit is denied, Ievy T’ of service tax on transportation will become a tax on business  rather  than  on consumption.

• Lastly, the Tribunal has further made a very important and distinct point that the interpretation of the expression ‘input service’ cannot fluctuate with the change in the definition of value in S. 4 of the Central Excise Act and cannot vary depending on whether the goods are levied to duty u/s.4A of the Excise Act or tariff value u/s.3(2) of the Excise Act. This has been done by the Tribunal while also noting the decision of Punjab & Haryana High Court in the case of Ambuja Cements Ltd. v. UOI & Others, 2009 (14) STR 3 (P&H) which provided its decision based on and approving the clarification given vide CBEC Circular No. 97/8/2009 dated 23-8-2007 as regards CENVAT credit. Thus, interpreting all the aspects of the definition of ‘input service’ in detail, it was held that GTA service of final products from the place of removal should be treated as input service.

[Note: Readers may note that the last two points make the decision distinct from the decisions provided in the case of CCE Mumbai 5 v. GTC Industries ua., 2008 (12) STR 468 (Tri.LB) and the Punjab & Haryana High Court decision in the case of Ambuja Cements Ltd. (supra). The gist of these two decisions was provided in December 2008 and May 2009 BCAJ respectively].

ii) Supplementary invoices and invoice without registration number, whether eligible for credit :

Sanghi Industries Ltd. v. CCE, Rajkot 2009 (14) STR 462 (Tri.-Ahmd.)

• In this case CENVAT credit was denied on the ground that a supplementary invoice was issued for the amount of service tax as the original invoice omitted to mention the same. In another invoice, registration number of the service provider was not provided. It was held that Rule 9 of the CENVAT Credit Rules was not considered by the lower authorities: Substantive compliance being sufficient for granting credit, the matter was remanded to the Commissioner (Appeals) to decide afresh in the light of the aforesaid observations.

iii) Car repairs, photography, rent-a-cab, etc. used ,for business admissible as credit:

CCE, Jaipur v. J. K. Cement Works, 2009 (14) STR 538 Tri.-Del)

Revenue’s appeal against allowance of CENVAT credit in respect of rent-a-cab service, repairs of motor cars and photography services used for business purposes was dismissed on the following grounds:

(a) The revenue did not controvert use for business.

(b) Tribunal’s decisions in various cases including those in the case of Indian Rayon Industries Ltd. v. CCE, 2006 (4) STR 79, Grasim Industries v. CCE, [aipur 2008 (11) STR 168 and CCE, Nasik v. Cable Corporation of India Ltd., 2008 (12) STR 598 were considered wherein allowancy of CENVAT in relation to similar services was upheld as input services for the manufacturer based on the con-tention that ‘in relation to’ in the definition of input service has to be given wider connotation and the illustrative list of the activities is not ex-haustive as the words ‘such as’ follow the words ‘activities relating to business’. Accordingly, denial of credit was not found justified.

(iv) GTA services used for construction of plant admissible as input service:

CCE, Vadodara v. Videocon Industries Ltd., 2009 (14) (STR) 692 (Tri.-Ahmd.)

The Revenue’s appeal was rejected as service tax paid on goods transport agency service in respect of steel, cement, etc. used in civil work of new plant/factory was held as covered by the definition of input service.