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 manufacturing process. The court ruled that service tax liability, being an indirect tax, can be passed on by distillers to retail contractors. The writ petitions were disposed of in favor of the Central Excise Department, allowing them to recover service tax from distillers and confirming distillers' right to pass on the tax liability to retail contractors. Each party was directed to bear their own costs.

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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.

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