2008 (3) TMI 319 - HC - Service Tax

Bottling Liquor Equals Manufacturing, Not Packaging: Legal Precedent Overturned

MAA SHARDA WINE TRADERS Versus UNION OF INDIA

The court ruled that bottling of liquor is considered an integral part of the manufacturing process and not merely a packaging activity, as per Section ... Packaging Service – Bottling of liquor – manufacture versus packaging – applicability of service tax - packaging and bottling of liquor come within the ambit and sweep of manufacture within the meaning of clause (f) of Section 2 of Central Excise Act, 1944 in view of the definition contained in Section 65(76b) of the Finance Act especially keeping in view the exclusionary facet and further regard being had to the circular issued by Central Board of Excise and Customs – bottling of liquor is not subject to service tax under packaging service. Issues Involved:1. Constitutional validity of Section 65(76b) of the Finance Act, 1994 as amended by the Finance Act, 2005.2. Whether bottling of liquor amounts to manufacture or packaging, attracting Service Tax.Detailed Analysis:1. Constitutional Validity of Section 65(76b) of the Finance Act, 1994:The petitioners initially challenged the constitutional validity of Section 65(76b) of the Finance Act, 1994, arguing that the Legislature lacked competence to enact such legislation and that it violated Article 14 of the Constitution of India. However, during the hearing, the petitioners abandoned this argument, focusing instead on the interpretation of the provision.2. Whether Bottling of Liquor Amounts to Manufacture or Packaging:The primary issue was whether the bottling of liquor constitutes a manufacturing process or merely a packaging activity subject to Service Tax under Section 65(76b) of the Finance Act.Factual Background:- The petitioner purchases bottles of country spirit from licensees who manufacture and supply country liquor in sealed bottles under the M.P. Excise Act, 1915 and the M.P. Country Spirit Rules, 1995.- The process involves distillation of rectified spirit, blending, bottling, sealing, and labeling, which is then supplied to retail contractors.Arguments by Petitioners:- The petitioners argued that bottling is an integral part of the manufacturing process, as defined under Section 2(f) of the Central Excise Act, 1944, and thus should not attract Service Tax.- They emphasized that the entire activity, including bottling, is a composite manufacturing process performed under the supervision of excise authorities.Arguments by Respondents:- The respondents contended that bottling and labeling are separate service activities subject to Service Tax, relying on the decision in M/s. Vindhyachal Distilleries Pvt. Ltd., which held that these activities do not constitute manufacturing.Court's Analysis:- The court scrutinized Section 65(76b) of the Finance Act, which defines 'packaging activity' but excludes any activity that amounts to 'manufacture' under Section 2(f) of the Central Excise Act.- Section 2(f) of the Central Excise Act includes any process incidental or ancillary to the completion of a manufactured product.- The court referred to circulars issued by the Central Board of Excise and Customs, which clarified that the production of alcoholic beverages, even if not excisable, still qualifies as a manufacturing process under Section 2(f).Key Judgments and Circulars:- The court cited the decision in Sir Shadilal Distillery and Chemical Works, which held that bottling of liquor is an integral part of the manufacturing process.- Circular F. No. 249/1/2006 - CX.4, dated 27th October 2008, clarified that processes amounting to manufacture under Section 2(f) would not attract Service Tax, even if the final product is not excisable.Conclusion:- The court concluded that the bottling of liquor is an integral part of the manufacturing process and not merely a packaging activity.- The decision in M/s. Vindhyachal Distilleries Pvt. Ltd., which held otherwise, was overruled.- The court upheld the view in Som Distilleries & Breweries Pvt. Ltd., ruling that packaging and bottling of liquor come within the ambit of manufacture under Section 2(f) of the Central Excise Act and thus are not subject to Service Tax under Section 65(76b) of the Finance Act.Final Judgment:'The decision rendered in M/s. Vindhyachal Distilleries (supra) does not state the law correctly inasmuch as it has expressed the opinion that packaging and bottling of liquor are not the part of manufacturing process and hence, liable to service tax and we uphold the view taken in Som Distilleries (supra) and, therefore, rule that packaging and bottling of liquor come within the ambit and sweep of manufacture within the meaning of clause (f) of Section 2 of Central Excise Act, 1944 in view of the definition contained in Section 65(76b) of the Finance Act especially keeping in view the exclusionary facet and further regard being had to the circular issued by Central Board of Excise and Customs.'The matter was then listed before the appropriate Division Bench for final disposal.