2009 (8) TMI 50 - HC - Service Tax

Manufacturer entitled to CENVAT credit for advertising and sales-promotion services under Rule 2(1) with demonstrated nexus

M/s. Coca Cola India Pvt. Ltd. Versus The Commissioner of Central Excise, Pune-III

HC held that a manufacturer of concentrate for aerated waters may avail CENVAT credit on service tax paid for advertising and sales-promotion services as ... Eligibility to avail credit - Advertisement or sales promotion of aerated waters undertaken by manufacturer of concentrate - inclusive part of the definition of 'input service' contained in Rule 2(1) - Whether services of advertising and marketing procured by the Appellants in respect of advertisements for aerated waters are covered by the definition of the words 'input services' as defined in Rule 2(1)of the CENVAT Credit Rules, 2004, when admittedly the Appellants manufacture concentrates exclusively used for the manufacture of the respective aerated waters which are advertised by the Appellants ? HELD THAT:- In HCL Ltd. Vs. Collector of Customs [2001 (3) TMI 971 - SC ORDER] Sl. No. 53 of Notification No. 96/61-Cus dated 25.07.1991 referred to automatic testing or marking or printing or typing machine or any combination thereof and exempted customs duty in excess of 20% ad valorem. Notification No. 59/88-Cus dated 01.03.1988 referred to optical time domain reflectometer and exempted customs duty in excess of 55% ad valorem. Assessee imported a optical time domain reflectometer. There was no dispute that product in question was a optical time domain reflectometer. Assessee claimed the benefit of Sl. No. 53 of Notification No.96/61-Cus. CESTAT held that product is squarely and more specifically covered by Notification No. 59/88-Cus and rejected the assessee's contention. Explanatory note by HSN to Heading 21.06 proves the integral link between concentrate manufactured by the assessee and the beverage (aerated water) manufactured by the bottler from it. The concentrate manufactured by the assessee in question has been classified and assessed to Cenvat (excise duty) under heading 21.06 by the Schedule to Central Excise Tariff Act, 1985. That heading is identical to heading 21.06 of organised system of nomenclature issued by WCO. In fact our Excise Tariff is based on HSN. Therefore, Supreme Court has repeatedly emphasized that the Explanatory Notes of HSN are are valuable material for understanding the scope of various headings in the Central Excise Tariff. The credit is availed on the tax paid on the input service, which is advertisement and not on the contents of the advertisement. Thus it is not necessary that the contents of the advertisement must be that of the final product manufactured by the person advertising, as long as the manufacturer can demonstrate that the advertisement services availed have an effect of or impact on the manufacture of the final product and establish the relationship between the input service and the manufacture of the final product. The manufacturer thereby can avail the credit of the service tax paid by him. Once the cost incurred by the service has to be added to the cost, and is so assessed, it is a recognition by Revenue of the advertisement services having a connection with the manufacture of the final product. This test will also apply in the case of sales promotion. Having thus arrived at the conclusion on the meaning of the expression of input services and that manufacturer can avail of the credit of the services tax paid by him for payment of CENVAT duty - both questions in the affirmative, in favor of the Appellants and against the Revenue Issues Involved1. Whether services of advertising and marketing procured by the Appellants for advertisements of aerated waters are covered under 'input services' as per Rule 2(1) of the CENVAT Credit Rules, 2004.2. Whether advertisement or sales promotion of aerated waters by the manufacturer of concentrate is covered by the inclusive part of the definition of 'input service' under Rule 2(1) of the CENVAT Credit Rules, 2004.Issue-Wise Detailed Analysis1. Advertising and Marketing Services as 'Input Services'The primary issue was whether the advertising and marketing services procured by the Appellants for aerated waters fall under the definition of 'input services' in Rule 2(1) of the CENVAT Credit Rules, 2004. The Appellants manufacture non-alcoholic beverage bases (concentrates) used exclusively for aerated waters like Coca-Cola and Fanta. The advertisement expenses incurred by the Appellants form part of the sale price of the concentrates on which duty has been paid.The court referred to the definition of 'input service' in Rule 2(1), which includes services used directly or indirectly in or in relation to the manufacture of final products, advertisement or sales promotion, market research, and other activities relating to business. The court emphasized that the inclusive part of the definition enlarges the scope of input services, allowing credit for services that may not be directly covered by the initial part of the definition.The Appellants argued that the advertisement of the brand name and the soft drink has a direct relationship with the manufacture of concentrate, as the demand for the concentrate is proportionate to the consumption of the soft drink. The court accepted this argument, noting that the advertisement expenses are part of the manufacturing cost of the concentrates and contribute to their marketability.2. Advertisement and Sales Promotion as 'Input Services'The second issue was whether the advertisement or sales promotion of aerated waters by the manufacturer of concentrate is covered by the inclusive part of the definition of 'input service.' The court noted that the definition of 'input service' includes services used in relation to advertisement or sales promotion, market research, and activities relating to business.The court referred to various judicial pronouncements and the Finance Minister's speech during the Union Budget 2004-05, which highlighted the integration of tax on goods and services and the extension of credit of service tax across goods and services. The court also considered the OECD guidelines, which state that VAT is a consumption tax borne by the final consumer, and businesses should be allowed to take credit for tax paid on inputs.The court concluded that the advertisement of aerated waters enhances the marketability of the concentrates and is therefore covered by the inclusive part of the definition of 'input service.' The court emphasized that the burden of service tax must be borne by the ultimate consumer, and denying credit for input services would go against the core principle of CENVAT as a value-added tax.ConclusionThe court answered both questions in the affirmative, in favor of the Appellants and against the Revenue. The impugned order of the Commissioner, Central Excise, Bombay III, and the order of the Tribunal were set aside. The matter was restored to the file of the Commissioner, Central Excise, to pass an appropriate order in light of the judgment. The appeal was disposed of accordingly.