NO GST ON CONTRACTUAL LIQUOR BOTTLING (PART-1)
By: – Dr. Sanjiv Agarwal
Goods and Services Tax – GST
Dated:- 28-9-2018
Manufacture or production of liquor has always been a controversial matter in indirect tax regime. While the Constitution of India does not allow Union to levy any tax (earlier central excise duty or Goods and Services Tax now) on manufacture of alcoholic beverages meant for human consumption, i.e. potable liquor, it remains a State subject. This was earlier subject to levy of State Excise Duty and Value Added Tax and now subject to same taxes, it being out of GST ambit.
Pre-GST taxation
Prior to GST coming into force w.e.f. 01.07.2017, following taxes were levied on manufacture of alcoholic beverages meant for human consumption:
* State excise duty (on manufacture)
* Value added tax (on transfer of goods)
* Service Tax (based on contractual arrangements between bottlers and brand owners)
Both, prior and post 01.07.2017 (when negative list wa
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I 319 – MADHYA PRADESH HIGH COURT , it was held that “CBEC Circular dated 27.10.2008 on levy of service tax on production of alcoholic beverages on job work basis is in consonance with the statutory provisions and law as laid down by the Supreme Court. Keeping in view the dictionary clauses and circulars issues by the CBEC, it is quite luminescent that word 'manufacture' has to be understood in a broader sense and not to be confined or restricted to the excisable product in the Act. It would include all processes which amount to manufacture whether or not the final product is an excisable product.
In Sir Shadilal Distillery and Chemical Works & Another v. State of Uttar Pradesh, 1996 (1) TMI 453 – SUPREME COURT OF INDIA , Apex Court after referring to the decision rendered in Khoday Distilleries Ltd v. State of Karnataka 1995 (12) TMI 378 – SUPREME COURT OF INDIA had expressed the view that bottling of liquor is an integral part of manufacture and supply thereof.
The manufacturing pr
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n so held in Som Distilleries and Breweries Pvt. Ltd. v. State of MP 1996 (7) TMI 568 – MADHYA PRADESH HIGH COURT .
The decision rendered in M/s Vindhyachal Distilleries Pvt Ltd v. State of MP 2006 (4) TMI 249 – MADHYA PRADESH HIGH COURT does not state the law correctly inasmuch as it has expressed the opinion that packaging and bottling of liquor are not the part of manufacturing process and hence liable to service tax”.
Normally in such an arrangement, following cost elements are found –
(i) Bottling / job charges – paid to CBU
(ii) Distribution costs including freight, transit insurance etc – paid to CBU
(iii) Other reimbursable – paid to CBU
(iv) Cot of raw materials – paid to CBU
(v) Cost of packing materials – paid to CBU
(vi) State excise duty and VAT – paid to State Government
(vii) Surplus/profit – retained by BO
On 27.10.2008, the Ministry of Finance issued a Circular which specified taxability issue with reference to alcoholic products. Accordingly,
* 'Manufactur
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is being borrowed.
Thus just because Central Excise Act does not extend to the manufacture or production of alcoholic beverages meant for human consumption, it cannot be said that the term 'manufacture' used in Business Auxiliary Service would also not cover the process of making the said product, namely alcoholic beverages.
Such processes amounting to manufacture on production of goods were placed under negative list and no Service Tax was leviable thereon. There was no levy of service tax on any process or job work amounting to manufacture or production of goods including manufacture of alcoholic liquors for human consumption, opium, India hemp and narcotic drugs on which State excise duties are leviable. In essence, these were out of service tax net because in case of manufacture of goods, excise duties are leviable and in case of alcoholic beverage etc. these are subjects of taxation by States and not covered under Central Excise Act, 1944. Earlier, exemption was provided to se
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ed / documents maintained by the CBU.
* As regards the statutory levies, namely, excise duty/VAT, they do not present any 'consideration' for rendering the service. Whether such amount is paid by BO or by CBU, they have no nexus with the provision of service. As such, these levies will not be included for charging service tax.
* Similarly, the surplus/profit earned by the BO being in the nature of business profit (which falls within the purview of direct taxes), will not be chargeable to service tax.
The taxability was tested and decided in Blossom Industries Ltd. v. Commissioner, Daman 2015 (10) TMI 859 – CESTAT AHMEDABAD , wherein it was held that on plain reading of the Board instruction, it is clear that one of the elements of gross value of invoice is 'surplus/profit retained by BO', which would not be included in taxable value. In other words, the amount returned to BO is in so far as 'surplus/profit' of BO, cannot be included in the taxable value. The amount
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t, not amounting to manufacture or production of goods carried out by a person for another for consideration. Some of such services relating to processes not amounting to manufacture were exempt under Notification No. 25/2012-ST dated 20-6-2012 (entry No. 30).
Amendment made by Finance Act, 2017
Finance Act, 2017 had omitted the entry in clause 40 of section 65B within effect from the date of enactment. This omission is a consequent amendment as the said entry in negative list [Section 66D(6)] has been omitted and it will no longer be a part of negative list. However, the said service shall be allowed exemption under Entry No. 30(i) of amended Notification No. 25/2012-ST. The definition has now been provided in clause 2(ya) of the amended exemption Notification No. 25/2012-ST vide Notification No. 7/2017-ST dated 2.2.2017.
“(ya) 'process amounting to manufacture or production of goods' means a process on which duties of excise are leviable under section 3 of the Central Excise Act,
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9 of CGST Act, 2017. Accordingly, there shall be levied a tax called the central goods and services tax on all intra-State supplies of goods or services or both, except on the supply of alcoholic liquor for human consumption, on the value determined under section 15 and at such rates, not exceeding twenty percent, as may be notified by the Government on the recommendations of the Council and collected in such manner as may be prescribed and shall be paid by the taxable person.
Further, clause 12A of article 366 of the Constitution of India defines 'Goods and Services Tax' to mean any tax on supply of goods or services or both except taxes on the supply of the alcoholic liquor for human consumption. Thus, GST on alcoholic liquor for human consumption can not be levied under the present legal framework of GST.
(To be continued…)
Reply By Prasanna Kumar as =
Good article sir. Thank you.
Dated: 28-9-2018
Reply By Dr. Sanjiv Agarwal as =
Thanks.
Critical comments solicited.
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