Contract Manufacture Of Alcoholic Liquor For Another Entity Attracts Service Tax: CESTAT Delhi

The Customs, Excise and Service Tax Appellate Tribunal, New Delhi has held that manufacture of alcoholic liquor for human consumption undertaken by one entity on behalf of another is liable to service tax after alcoholic liquor was excluded from the negative-list entry with effect from June 1, 2015.

Relying on the Delhi High Court's ruling in Carlsberg India Pvt. Ltd. v. Union of India, the tribunal held,

"We find that section 66D of Finance Act, 1994 deals with the negative list of the services. The sub clause act effectively upto 31.05.2015 which described as “any process amounting to manufacture for production of goods w.e.f. 01.06.2015 it stipulates that service by way of carrying out any process amounting to manufacture for production of goods excluding liquor in human consumption which means that the manufacture of production of goods of alcoholic liquor for human consumption is outside the ambit of the exemption from payment of service tax”.

The bench comprising Judicial Member Ashok Jindal and Technical Member P.V. Subba Rao was hearing five connected appeals arising from service tax demands for April 2010 to March 2015 and April 2015 to June 2017.

Agribiotech Industries Ltd. was engaged in manufacturing liquor and had facilities for blending, distillery, packing and the required manpower in Rajasthan. As it did not own a brand name, it entered into an agreement with Allied Blenders & Distillery Pvt. Ltd. to manufacture and sell liquor under its brand name on a revenue-sharing basis.

Under the arrangement, Agribiotech procured raw materials according to the brand owner's instructions from vendors approved by the brand owner, at rates approved by the brand owner. The Revenue alleged that Agribiotech was providing Business Auxiliary Service by undertaking bottling and packing on a job-work basis for Allied Blenders.

The service tax demands were confirmed during adjudication, and the Commissioner (Appeals) affirmed the orders. Agribiotech then approached the tribunal.

Agribiotech argued that its activity amounted to manufacture and was therefore not liable to service tax. It relied on the Madhya Pradesh High Court's decision in Maa Sharda Wine Traders v. Union of India, as well as subsequent decisions of the tribunal.

The Revenue relied on the Delhi High Court's ruling in Carlsberg India Pvt. Ltd. v. Union of India, arguing that the manufacturing activity was not excluded from service tax under the 2012 notification

The tribunal framed the issue as whether manufacture of liquor by Agribiotech on behalf of the brand owner was liable to service tax. Agribiotech had also claimed the benefit of Notification No. 12/2012-ST on the ground that its activity amounted to manufacture.

The tribunal examined the changes to the negative list under Section 66D of the Finance Act, 1994. It noted that, until May 31, 2015, the relevant entry covered “any process amounting to manufacture for production of goods”. From June 1, 2015, the entry covered such processes while specifically excluding alcoholic liquor for human consumption.

The tribunal recorded that this meant manufacture of alcoholic liquor for human consumption was no longer covered by the negative-list exclusion from service tax.

The tribunal then relied on the Delhi High Court's decision in Carlsberg India. The high court had examined the statutory amendments and held that, while manufacture of alcoholic liquor by an entity for itself could not be treated as a service, manufacture undertaken by one entity for another for consideration had the character of a service.

The Delhi High Court had further noted that the Finance Act, 2015 removed the words “alcoholic liquors for human consumption” from the definition of “process amounting to manufacture or production of goods”. Section 66D was correspondingly amended to cover processes amounting to manufacture or production of goods “excluding alcoholic liquor for human consumption”. The high court observed that the commodity was thereby removed from the negative list.

The appointed date for the amendments was June 1, 2015. From that date, the high court held, contract manufacture of alcoholic liquor for human consumption had to be viewed as a service rendered by one party to another and was amenable to service tax.

The high court also drew a distinction between manufacturing liquor for oneself and undertaking manufacture for another entity. It observed that manufacture for another by way of job work answers the definition of a service under the Finance Act, which covers an activity carried out by one person for another for consideration.

Following Carlsberg, the tribunal held that the decisions relied upon by Agribiotech were not applicable to the case. It observed that Maa Sharda Wine Traders did not examine the negative-list regime for service tax. The tribunal also noted that the other decisions relied upon by Agribiotech had followed the Madhya Pradesh High Court ruling and were therefore not applicable.

The tribunal ultimately ruled, “Now following the decision of the Hon'ble High Court of Delhi in the case of Carlsberg India Pvt. Ltd. (supra), we hold that the activity [i.e. manufacturing of liquor (which is not an excisable goods) on behalf of others] undertaken by the appellant falls under negative list as taxable service, therefore, the appellant is liable to pay service tax.”

The tribunal found no merit in the appeals and dismissed them.

For  Appellant: Priyanka Goyal, Advocate

For Respondent: Jaya Kumari, Authorised Representative