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

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 ... Input service - Cenvat credit - value added tax / consumption tax - means and includes (definition interpretation) - activities relating to business - advertisement and sales promotion as input services - indirect use in or in relation to manufacture - place of removal - estoppel by acceptance of assessable valueInput service - advertisement and sales promotion as input services - indirect use in or in relation to manufacture - means and includes (definition interpretation) - Services of advertising and marketing procured by the appellants in respect of advertisements for aerated waters are covered by the definition of 'input service' in Rule 2(1) of the CENVAT Credit Rules, 2004 so as to permit credit utilisation for payment of excise duty on the concentrate. - HELD THAT: - The Court analysed the definition clause in Rule 2(1) which uses the words 'means' and 'includes' and held that the inclusive part enlarges the scope of input services available to a manufacturer. Held that the phrase 'used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products' encompasses services which, though not literally advertising the intermediate product, have a demonstrable effect on the manufacture and marketability of the final product made from the concentrate. The Court relied on the principle that service tax/Cenvat is a value added consumption tax and that any input service which forms part of the value of the final product ought to qualify for credit. The commercial and factual nexus between brand advertising of the aerated water and the demand/production of concentrate, the inclusion of advertising costs in the assessable value of concentrate (as accepted by Revenue), and authorities treating marketing/advertising as components of value were held sufficient to bring such services within the definition of input service. The Court emphasised that credit is on the service tax paid on the input service and not on the literal contents of the advertisement, provided the manufacturer establishes the relationship between the input service and the manufacture of the final product. [Paras 34, 43, 44]Affirmed that advertising and marketing services in the facts of this case qualify as input services under Rule 2(1) and credit of service tax paid thereon is available to the manufacturer for payment of CENVAT duty on the concentrate.Activities relating to business - value added tax / consumption tax - estoppel by acceptance of assessable value - The inclusive part of the definition of 'input service' (services 'used in relation to' advertisement, sales promotion, market research and 'activities relating to business') covers advertisement or sales promotion of aerated waters undertaken by the manufacturer of concentrate and permits availment of credit. - HELD THAT: - The Court construed the expressions 'such as', 'activities relating to business' and 'relating to' as illustrative and of wide import, thereby widening the category of services eligible as input services. It applied established fiscal and commercial principles, including precedents recognising advertising and marketing expenses as forming part of the value of excisable goods, and international VAT reasoning that input tax credit must be allowed where services are for purposes of the claimant's business. The Court also held that where Revenue has treated advertisement expenditure as part of assessable value of concentrate, Revenue is estopped from denying credit. Consequently, advertisement, sales promotion and closely related activities fall within the inclusive limb and credit is allowable subject to the manufacturer establishing the requisite nexus. [Paras 21, 34, 44]Affirmed that the inclusive part of the definition covers such advertisement and sales promotion undertaken by the concentrate manufacturer and that credit is available accordingly.Final Conclusion: Both questions referred were answered in the appellants' favour: advertising, sales promotion and related marketing services procured by the concentrate manufacturer qualify as 'input service' under Rule 2(1) and credit of service tax paid thereon is available for payment of CENVAT duty on the concentrate. The impugned orders are set aside and the matter is restored to the Commissioner, Central Excise for appropriate orders in accordance with this judgment. 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.