2006 (4) TMI 249 - HC - Service Tax

Court rules packaging activities for liquor are subject to service tax, can be passed on to contractors.

The court held that packaging activities, including bottling and labeling of liquor, are subject to service tax as they do not constitute part of the ... Packaging activity as a taxable service (including bottling, labelling and sealing) - process of manufacture within the meaning of Section 2(f) of the Central Excise Act, 1944 - service tax as an indirect tax and the permissibility of passing on the tax to the service receiver - excisable goods and the exclusion of alcoholic liquors for human consumption from Chapter 22Packaging activity as a taxable service (including bottling, labelling and sealing) - process of manufacture within the meaning of Section 2(f) of the Central Excise Act, 1944 - excisable goods and the exclusion of alcoholic liquors for human consumption from Chapter 22 - Whether bottling, labelling and sealing of country liquor, as carried out under the tender conditions, is part of the process of manufacture or falls within the 'packaging activity' taxable under the Finance Act, 2005. - HELD THAT: - The Court examined the statutory definitions and the factual scheme established by the tender notice. Section 65(76)(b) (as inserted by Finance Act, 2005) defines 'packaging activity' to include bottling, labelling and imprinting, but expressly excludes packaging that amounts to 'manufacture' under Section 2(f) of the Central Excise Act. Section 2(f) treats as 'manufacture' only processes incidental or ancillary to completion of a manufactured product, processes specified in the Tariff notes, or packing/repacking specified in the Third Schedule. The tender conditions required distillers to perform bottling, labelling and sealing in semi-automatic plants at specified warehouses, to collect separate sealing/bottling charges and refundable bottle deposits, and to raise separate bills for cost of spirit and for sealing (packaging) charges. Chapter Note 4 to Chapter 22 excludes alcoholic liquors for human consumption from excisable goods, so bottled country liquor is not covered as an excisable product under the Central Excise Tariff. On the facts before the Court the packaging function was a separately contracted and charged service, distinct from the manufacture (conversion of rectified spirit into potable country spirit) which involved only strength adjustment and, where applicable, addition of colour/essence. Applying authority that whether a process constitutes 'manufacture' is a question of fact, the Court held that in these transactions the bottling/labeling/sealing obligations constituted a packaging service under Section 65(76)(b) and did not form part of the process of manufacture as defined in Section 2(f). [Paras 12, 13, 14, 15, 16]Bottling, labelling and sealing performed under the tender conditions are packaging activities taxable as services and are not part of the process of manufacture in the facts of this case.Service tax as an indirect tax and the permissibility of passing on the tax to the service receiver - collection of service tax from the service provider under the Finance Act and Service Tax Rules - Whether the service tax on the packaging activity, once leviable on the distillers as service providers, can be passed on to retail contractors. - HELD THAT: - Service tax is an indirect tax on the taxable service. The statutory scheme requires the person providing taxable service to pay service tax and provides for collection mechanisms. The Court relied on settled law that an indirect service tax may be reflected in the price charged to the service receiver. Having held the packaging function to be a taxable service provided by the distillers, the Court concluded that while Central Excise can recover service tax only from the service provider, the service provider may pass on the tax element to the retail contractors under the contractual and billing arrangements in place. The earlier Single Judge order that restrained recovery from retail contractors addressed only recovery directly by Central Excise from contractors and did not decide the distinct question whether the service provider may recover the tax element from contractors; that restraint therefore could not justify prohibiting the distillers from passing on the liability. [Paras 19, 20, 21, 22]Service tax on the packaging activity may be recovered by Central Excise from the distillers as service providers, and the distillers are entitled to pass on the tax liability to the retail contractors.Final Conclusion: The writ petitions are disposed of holding that bottling, labelling and sealing under the tender scheme constitute a taxable 'packaging activity' and not part of the process of manufacture in the facts before the Court; Central Excise may recover the service tax from the distillers as service providers and the distillers may pass on the service tax liability to the retail contractors; parties to bear their own costs. Issues Involved:1. Whether service tax on packaging, i.e., bottling and labeling of liquor, can be exacted from the distillers.2. Whether distillers can pass on this service tax liability to the contractors obtaining supplies from them.Detailed Analysis:1. Service Tax on Packaging of Liquor:The primary issue addressed is whether the packaging activity, including bottling and labeling of liquor, falls under the purview of service tax as per Section 65(76)(b) of the Finance Act, 2005. The petitioners, who are distillers and retail contractors, argued that bottling and sealing of liquor are integral parts of the manufacturing process and thus should not attract service tax. They contended that these activities are covered under the definition of 'manufacture' in Section 2(f) of the Central Excise Act, 1944, which includes processes incidental or ancillary to the completion of a manufactured product. The respondents, including the Central Excise Department, argued that bottling, labeling, and sealing are independent activities and not part of the manufacturing process. They maintained that these activities fall under the definition of 'packaging activity' in Section 65(76)(b) and thus attract service tax.2. Passing on Service Tax Liability:The second issue was whether the distillers could pass on the service tax liability to the retail contractors. The court noted that service tax is an indirect tax, which can be passed on to the service receiver. The court referenced the decision in T.N. Kalyana Mandapam Association v. Union of India, where it was held that service tax is a tax on services and not on the service provider, allowing the service provider to collect the tax from the client.Judgment:On Service Tax Applicability:The court concluded that the packaging activity, including bottling and labeling, does not constitute a part of the manufacturing process as defined under Section 2(f) of the Central Excise Act, 1944. The court distinguished the activities of packaging from the process of manufacture, noting that the excise duty is levied on manufacture, not on sale. The court found that the packaging activities were clearly services provided under Section 65(76)(b) of the Finance Act, 2005, and thus subject to service tax.On Passing on the Liability:The court held that the service tax liability, being an indirect tax, could be passed on by the distillers to the retail contractors. The court clarified that while the Central Excise Department could only recover the service tax from the service provider (distillers), the distillers were entitled to pass on this liability to the retail contractors.Conclusion:The court disposed of the writ petitions, holding that the Central Excise Department could recover service tax from the distillers for packaging activities under Section 65(76)(b) of the Finance Act, 2005. It also affirmed that distillers could pass on the service tax liability to the retail contractors. The parties were directed to bear their own costs.