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, promoting and marketing Pepsi-branded aerated beverages do not constitute "business auxiliary service" under s.65(19)(ii) of the Finance Act. BAS requires promotion or marketing of goods produced or provided by the client; here, the appellant advertises aerated water manufactured by itself, while Client-P produces only concentrates. The Bombay HC ruling in Coca Cola, concerning CENVAT credit on input services and the phrase "directly or indirectly," was held inapplicable. The earlier CESTAT ruling in favour of the appellant (SMV Beverages) was affirmed as not requiring reconsideration. The matter was remitted to the Division Bench to decide the appeal consistent with this view.

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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.

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