DRAFT CIRCULAR
(To elicit response/Comments only)
Levy of service tax on distillers under “Business Auxiliary Service” for manufacture of Indian Made Foreign Liquor on job work basis – reg.
A number of distillers are engaged in manufacture of Indian Made Foreign Liquor of various brands, on job work basis, on behalf of the brand owners. The activity involves blending, manufacturing, bottling, labelling, etc. These job workers do not have any proprietary rights over the goods produced. They are paid job charges by the brand owners who have the proprietary rights over the goods and who market and sell the IMFL produced by job workers. A doubt has arisen as to whether this activity of job worker falls under the category of taxable service, namely, ‘Business Auxiliary Services’ for the purposes of charging service tax under the Finance Act, 1994.
2. The business auxiliary service, inter alia, covers “production or processing” of goods on behalf of clients provided such activity of production or processing does not amount to “manufacture” within the meaning of clause (f) of section 2 of the Central Excise Act, 1944.
3. The manufacture of alcoholic beverages falls outside the ‘Union List’ of the Seventh Schedule to the Constitution of India, by virtue of Entry 51 (a) of List II of the Seventh Schedule. Therefore, the Central Excise Act cannot and does not apply to manufacture of alcoholic beverages. Accordingly, IMFL being potable alcoholic beverage is outside the scope of the Central Excise Law and the activity of making/ bottling/packing /labelling of potable alcoholic beverage, does not amount to “manufacture” within the meaning of clause (f) of section 2 of the Central Excise Act, 1944. Accordingly, by virtue of definition and scope of “business auxiliary service”, such activity of blending, manufacture, bottling or labelling, etc on job work basis by a distiller, in respect of Indian Made Foreign Liquor on behalf of brand owner, would be covered under the category of business auxiliary service.
4. Another doubt that arises is as to whether service tax can be charged on production of alcoholic beverages, which fall within the competence of State Legislature by virtue of the aforesaid Entry in the state list.
4.1. This matter was referred to the Law Ministry for their opinion. Law Ministry has opined that as the IMFL is not the subject matter of Union Excise, section 2(f) does not apply to it and that the definition of section 2 (f) can be restored for the purposes of Service Tax (it is a borrowing Act). As regards the legislative competence of Parliament to impose service tax levy, Entry 51 of List II provides for duties of excise, interalia, on alcoholic liquors for human consumption manufactured or produced in the State and countervailing duties at the same or lower rates on alcoholic liquor for human consumption manufactured or produced elsewhere in the country. Service tax not being countervailing duty, the question would arise only when it can be said that it is excise duty. However, service tax is distinct from excise duty. It has accordingly been opined that service tax on the service as defined in the Finance Act, 1994, is not constitutionally ultra vires as impinging on the legislative competence of the State Legislature as to excise duties. In coming to this conclusion, the Law Ministry has placed reliance on the judgments of the Hon’ble Supreme Court, in the matter of Gujarat Ambuja Cements Ltd Vs UOI (2005)4 SCC 214, and T N Kalayana Mandapam Association Vs UOI (2204) 5SCC 632, wherein service tax levy has been upheld on the service tax aspects of activities which are otherwise subject matter of State List.
5. In view of above, Board is of the view that the activity of blending, manufacture, bottling or labelling, etc on job work basis by a distiller, in respect of Indian Made Foreign Liquor on behalf of brand owner, would be covered under the category of business auxiliary service.
6. Trade and field formations may be advised accordingly.
Responses to the draft circular may please be sent to geebeetru@rediffmail.com or cx4cbec@yahoo.co.in or faxed at 011-23092275 by 20.10.2006.
Disclaimer:- This Draft Circular has been put up only to elicit public response. No final decision has been taken by Government/ Board. Government/ Board will proceed further in the matter only after due examination of the responses received.
F.No. 249/1/2006-CX.4
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