2024 (6) TMI 1527 - AT - Service Tax

Advertising incentives not taxable as business auxiliary service u/s65(19)(ii) when goods are self-manufactured by itself

CESTAT (LB) held that incentives described as 'net incentive' and 'support and other receipts' paid by Client-P to the appellant for advertising, ... Levy of service tax - business auxiliary service - received consideration in the form of ‘net incentive’ and ‘support and other receipts’ - providing service of advertising, promoting and marketing the trade mark alongwith promotion of sale of ‘concentrates’ produced and sold by Pepsi Food to the appellant - eligibility for CENVAT Credit - Applicability of decision in Coca Cola India Pvt. Ltd. vs. Commissioner of C. Ex., Pune-III - HELD THAT:- It would thus be seen that the decision of the Bombay High Court in Coca Cola [2009 (8) TMI 50 - BOMBAY HIGH COURT] is in respect of availment of ‘input service’ tax credit in respect of advertising and marketing services. The question that arose was whether the advertisement or sale promotion of aerated water undertaken by the manufacturers of concentrates would be covered under rule 2(l) of the 2004 Credit Rules. The Bombay High Court held that since the advertisement of aerated water indirectly also promotes the sale of ‘concentrates’, service tax paid on the advertisement of aerated water would be covered by the definition of ‘input service’ and hence credit could be taken. In the present case, the issue is regarding interpretation of clause (ii) of section 65(19) of the Finance Act. It would apply if the appellant promotes or markets the goods produced or provided by or belonging to the client. The client, in the present case, is Pepsi Foods and it produces ‘concentrates’ and not aerated water. Aerated water is manufactured by the appellant though the main raw material for this is ‘concentrate’, which is purchased by the appellant from Pepsi Foods. The definition of ‘input service’ contains the expression ‘directly or indirectly’, but such an expression does not find place in the definition of BAS, for the definition of BAS does not mention any service in relation to promoting or marketing of sale, directly or indirectly of the goods produced. The view of the department is that advertising of aerated water by the appellant would also result in increase of the sale of ‘concentrates’ purchased by the appellant from Pepsi Foods. Though, ‘concentrate’ is the main raw material for the manufacture of aerated water by the appellant, but the definition of BAS in section 65(19)(ii) of the Finance Act does not provide that the appellant would render BAS since the advertisement of aerated water would increase the sale of ‘concentrate’ - The decision of the Bombay High Court in Coca Cola would, therefore, not be relevant to the issue involved in the present appeal. The decision of the Tribunal in Beltek Canadian Water [2024 (2) TMI 139 - CESTAT ALLAHABAD] that was decided on 30.01.2024 now needs to be examined. This decision was rendered after the reference was made by the Division Bench. The appellant was engaged in the manufacture of packaged drinking water. It was noticed that the appellant had received incentives from M/s. Pepsi Foods to promote the sales of the goods of Pepsi brand, but it had not paid service tax. The issue, therefore, that arose before the Tribunal was whether the sale incentive, advertisement and publicity charges received by the appellant could be subjected to service tax under BAS. The Tribunal followed its earlier decisions in Narmada Drinks (P) Ltd. vs. Commissioner of Central Excise, Raipur [2017 (3) TMI 1106 - CESTAT NEW DELHI], Commissioner of C. Ex. & S.T., Lucknow vs. Brindavan Bottlers Ltd. [2019 (3) TMI 1428 - CESTAT ALLAHABAD] and SMV Beverages and held 'In view of the decisions as above we do not find any merits in the impugned order demanding the service tax by classifying the incentive and sale promotion receipts, to be towards the provisions of “business auxiliary services.' - The aforesaid Division Bench of the Tribunal have for good reasons distinguished the decision of the Bombay High Court in Coca Cola. The view taken in the reference order that “net incentive” and “support and other receipt” are not only for enhancement of the visibility and goodwill of the brand name owned by Pepsi Foods, but also promote the sale of ‘concentrates’ has been found to be too farfetched and has not been accepted by benches of the Tribunal. The receipt of incentives by the appellant from Pepsi Foods under the head “net incentive” and “support and other receipts” for advertising, promoting and marketing the trademark would not mean that BAS has been provided by the appellant - The decision of the Tribunal in the matter of the appellant for the earlier period would, therefore, cover the controversy involved in this appeal. This decision was not followed by the Division Bench in the reference order only because of the decision of the Bombay High Court in Coca Cola. The decision of the Bombay High Court in Coca Cola India Pvt. Ltd. vs. Commissioner of C. Ex., Pune-III would have no application in the present case and, therefore, the decision of the Tribunal in the matter of the appellant in SMV Beverages Pvt. Ltd. vs. Commissioner of Central Excise, Nagpur does not require any reconsideration. The papers may now be placed before the Division Bench of the Tribunal for deciding the appeal. 1. ISSUES PRESENTED AND CONSIDERED (1) Whether incentives received for advertising, promotion and marketing of beverages and trademarks are taxable as 'business auxiliary service' under section 65(19)(i) and (ii) of the Finance Act, 1994. (2) Whether the judgment concerning admissibility of CENVAT credit on advertisement and sales promotion services used by a manufacturer of concentrates (Coca Cola) governs or alters the interpretation of 'business auxiliary service' in this context. (3) Whether promotion of trademarks/brand names falls within 'business auxiliary service' prior to introduction of the specific taxable category of 'brand promotion service' under section 65(105)(zzzzq). 2. ISSUE-WISE DETAILED ANALYSIS Issue (1): Taxability of incentives as 'business auxiliary service' for promotion of beverages / trademarks Legal framework (as discussed) (a) Section 65(19)(ii) of the Finance Act, 1994 defines 'business auxiliary service' to include services in relation to promotion or marketing of goods produced or provided by or belonging to a client. (b) Post 01.07.2012, the definition of 'service' under section 65B(44) requires (i) an activity carried out by one person for another, and (ii) consideration for such activity. Interpretation and reasoning (c) The client in the present business model manufactures and sells 'concentrates' to the bottler; the bottler manufactures and sells 'aerated water' under licensed trademarks. (d) The relevant contractual clauses obligate the bottler to take steps to promote and enhance visibility and goodwill of the trademarks and to maximize sales and market share of the beverages, with prior approval of the trademark owner for advertising and sales promotion material. (e) The Tribunal had earlier held (for an overlapping earlier period under an essentially identical agreement) that such clauses do not indicate any obligation to promote, market or sell the goods produced or provided by, or belonging to, the concentrate manufacturer; the concentrate, once sold on payment of excise duty, ceases to belong to the manufacturer. (f) The Tribunal reaffirmed that the bottler's activities relate to promotion and sale of its own manufactured beverages, not promotion or marketing of the client's 'concentrate' as goods; no promotion schemes relate to 'concentrate' as a marketed product. (g) The statutory definition of 'business auxiliary service' does not employ the phrase 'directly or indirectly' in relation to promotion/marketing of goods, unlike the definition of 'input service' under the CENVAT Credit Rules; hence, indirect commercial benefit to the concentrate supplier from increased beverage sales does not suffice. (h) The departmental position that advertising and promotion of beverages necessarily promotes the sale of concentrates was found to be a farfetched construction; if accepted, every manufacturer's sale of finished goods using any input would always 'promote' the input supplier's goods, which is neither logical nor intended by the statute. (i) The monetary receipts styled as 'net incentive' and 'support and other receipts' represent sharing/reimbursement of advertisement and sales promotion expenditure; they arise in the course of principal-to-principal dealings and reflect financial accommodation, not consideration for a separately identifiable service of promoting the client's goods. (j) Even post 01.07.2012, the activities were held to be undertaken by the bottler on its own account for its own business purposes; mere partial financial support from the client does not convert such self-promotion into an 'activity carried out by a person for another' within section 65B(44). Conclusions (k) The activities and incentives in question do not constitute 'business auxiliary service' under section 65(19)(ii) because the bottler is not promoting or marketing goods produced or provided by or belonging to the client ('concentrates'); it promotes its own beverages. (l) Reimbursement / sharing of advertisement and promotion expenses in the form of incentives does not amount to consideration for a taxable service under 'business auxiliary service' either before or after 01.07.2012. (m) The earlier Tribunal decision in the same assessee's case holding that section 65(19) did not apply on identical facts correctly states the law and governs the present period. Issue (2): Applicability of the Coca Cola judgment on CENVAT credit to interpretation of 'business auxiliary service' Legal framework (as discussed) (a) Rule 2(l) of the CENVAT Credit Rules, 2004 defines 'input service' to include services used by a manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products, and services used for 'activities relating to business', including advertisement and sales promotion. (b) In Coca Cola, the High Court considered whether advertisement and sales promotion of aerated waters by a manufacturer of concentrates constituted eligible 'input service' under rule 2(l), so that credit of service tax paid on such services could be used to pay excise duty on concentrates. Interpretation and reasoning (c) The High Court's reasoning turned on the breadth of 'activities relating to business' and the express allowance for services used 'directly or indirectly' in or in relation to manufacture of final products, to treat advertisement of aerated waters as indirectly promoting concentrates and thus as 'input service'. (d) The present controversy is not about availability of CENVAT credit on advertisement services, but about classification and taxability of incentives under 'business auxiliary service' for alleged promotion of the client's goods. (e) Section 65(19)(ii) defining 'business auxiliary service' does not include 'directly or indirectly' language, and does not hinge on 'activities relating to business'; it requires that the service be 'in relation to promotion or marketing of goods produced or provided by or belonging to the client'. (f) The relationship examined in Coca Cola was between the manufacturer of concentrates and its own use of advertisement services for its business; the present case concerns whether a separate contracting entity (the bottler) is rendering a taxable service to the concentrate manufacturer by promoting goods of the latter. (g) Relying on Coca Cola to treat every indirect commercial benefit to an input supplier from the buyer's advertising as 'promotion/marketing of the supplier's goods' under 'business auxiliary service' was held to be a misplaced and over-extended application of that judgment. Conclusions (h) The ratio in Coca Cola, confined to the scope of 'input service' under rule 2(l) of the CENVAT Credit Rules, 2004, has no application to the interpretation of 'business auxiliary service' under section 65(19). (i) The earlier Tribunal decision in the same assessee's case does not require reconsideration on account of Coca Cola and remains good law on the present issue. Issue (3): Whether brand/trademark promotion was covered by 'business auxiliary service' prior to introduction of specific 'brand promotion service' Legal framework (as discussed) (a) Section 65(19) defining 'business auxiliary service' during the relevant period did not expressly include promotion of brand name or trademark of a client. (b) With effect from 01.07.2010, a separate taxable category of 'brand promotion service' was introduced by section 65(105)(zzzzq). (c) The High Court has held that introduction of a new specific taxable entry and inclusion of certain services within it presupposes that such services were not earlier covered by any existing entry; creation of the new entry is not a carve-out from, or mere amendment of, the earlier entry. Interpretation and reasoning (d) On the facts, the bottler's contractual obligations and actual activities primarily concerned promotion and enhancement of visibility and goodwill of the trademarks/brands, and associated advertising of beverages. (e) Section 65(19), by its text, refers to promotion or marketing of goods or services of the client; it does not mention promotion of brand or trademark per se. (f) The later legislative act of introducing a distinct 'brand promotion service' entry confirms that brand/trademark promotion was not regarded as already covered under 'business auxiliary service'. Conclusions (g) Promotion of trademarks/brand names of a client is not covered within the scope of 'business auxiliary service' under section 65(19) during the relevant period. (h) Since the impugned activities are, at most, brand/trademark promotion and not promotion of client's 'concentrate' as goods, they cannot be taxed as 'business auxiliary service' for the period in dispute. (i) The reference is answered by holding that Coca Cola has no bearing on the present BAS issue, and the prior Tribunal ruling exonerating similar receipts from BAS remains valid and requires no reconsideration.