Does ‘manufacture’ include ‘Packaging Activity’ or does ‘Packaging Activity’ constitute a separate and an independent service?

The article provides valuable insight on the taxability of the packaging activity based on the judgment delivered in the case of Vindhyachal Distilleries (P.) Ltd. vs. State of Madhya Pradesh [2006] 5 STT 254 (MP)

The article analyzes the service of ‘Packaging Activity’ as defined under section 65 of the Finance Act, 1994; read with section 2(f) of the Central Excise Act, 1944 based on the above-mentioned judgment.

Fact of the case

The petitioners were distillers/ retail contractors holding licence for supply of country made liquor. The distillers were entitled to receive the cost price of liquor from the Government and bottling and sealing charges of
Rs. 2.25 per bottle from the retail contractors.

The retail contractors were required to deposit the bottling and sealing charges in advance before lifting the country liquor from the warehouse. The deposit amount was refunded to the retail contractors when the empty bottles were returned back. The glass bottles were not sold but reused again and again for bottling country liquor.

The Excise Commissioner directed all the distillers/service provider to get themselves registered and pay service tax on such packaging/sealing charges vide letter dated 13-9-2005.

Further, the Excise Commissioner, Gwalior M.P. clarified on 27-9-2005 that service tax was an indirect tax. The liability of payment of the service tax was on the distillers, i.e. the service provider. However, the same could be passed on to the retail contractors. The retail contractors could further pass it on to the final consumers.

Further, it should be noted that service provided in relation to ‘Packaging activity’ is a taxable service under service tax vide section 65(76b) of the Finance Act w.e.f 16-6-2005.

The term ‘packaging activity’ is defined as under:–

"65(76b) ‘packaging activity’ means packaging of goods including pouch filling, bottling, labelling or imprinting of the package, but does not include any packaging activity that amounts to ‘manufacture’ within the meaning of clause (f) of section 2 of the Central Excise Act, 1944 (1 of 1944)".

The process of ‘manufacture’ has been defined in section 2(f) of the Central Excise Act, 1944 as under:–

‘manufacture’ includes any process:–

1. incidental or ancillary to the completion of a manufactured product;
    

2. which is specified in relation to any goods in section or the Chapter Notes of the First Schedule to the Central Excise Tariff Act, 1985 (5 of 1986) as amounting to manufacture; or
    

3. which, in relation to the goods specified in the Third Schedule, involves packing or repacking of such goods in a unit container or labelling or re-labelling of containers including the declaration or alteration of retail sale price on it or adoption of any other treatment on the goods to render the product marketable to the consumer.

The term ‘excisable goods’ is defined in section 2(d) as follows:–

‘excisable goods’ means goods specified in the First Schedule and the Second Schedule of the Central Excise Tariff Act, 1985 (5 of 1986), as being subject to a duty of excise and includes salt.

Petitioner’s contentions

The main contentions of the petitioner were:–

• The distiller is given licence under the M.P. Country Spirit Rules to manufacture country spirit from rectified spirit by essencing, colouring, flavouring, reducing, blending etc. at the manufacturing warehouses. Colouring and flavouring agents are added at the time of maturation. The above-mentioned treatment enables to overproof the spirit in order to render it fit for human consumption in the form of country liquor. This process is manufacturing of country liquor in the real sense as well as within the meaning and scope of the Central Excise Act, 1944 and the M.P. Excise Act, 1915.
   

• Packaging activity is covered by and was part of process of manufacture within the meaning of section 2(f) of the Central Excise Act, 1944. Thus, service tax could not be levied on such activity of packaging.
   

• Manufacture of country spirit includes bottling of liquor as per Rules 3(3) and 2A of the M.P. Country Spirit Rules. Hence, sealing of country liquor is not a packaging activity within the purview of service tax but is a part of the manufacturing process.
   

• Bottling and sealing activity is incidental to the process of manufacture to make it a marketable commodity. Sealing charges forms part of manufacturing cost. Thus, service tax should not be levied on the activity.

Submission by the Revenue

• The department submitted that bottling, labelling and sealing by pilfer proof cap of glass bottles of volume was an independent activity and was not part of process of manufacture of country made liquor. Process of packaging of goods including pouch filling, bottling, labelling or imprinting of the package is specifically included within the packaging activity. It was thus a service provided and hence service tax can be realized by the Central Excise Department.
   

• It was further stated, "as per section 2(d) of the Central Excise Act, excisable goods means goods specified in the First Schedule and the Second Schedule to the Central Excise Tariff Act, 1985. Chapter 22 of the Central Excise Tariff Act, 1985 covers beverages, spirits and vinegar, however, as per Chapter Note 4 alcoholic liquors for human consumption is not covered. The manufacture of liquor is not taxable under Central Excise Act and activity of distilling, bottling and packaging liquor is also not defined as the goods specified in section or Chapter Notes of the Central Excise Tariff Act, 1985. The bottled country liquor or its packing or repacking activity has not been mentioned/specified in Central Excise Tariff Act, and that is why it is not a Central Excise manufactured product and therefore, it is correctly falling under the purview of service tax under the head of packaging activity service with effect from 16-6-2005".
   

• The department stated that the liability of service tax could be recovered by the distillers from the contractors as per the provisions of rule 4A(1) of the Service Tax Rules, 1994.

Observations of the High Court

The observation of the court is summarized as under:–

• It has to be seen in every case whether packaging activity of packaging of goods including pouch filling, bottling, labelling or imprinting of the package is outside the purview of proves of manufacture. In case it is a part of process of manufacture as defined within the meaning of clause (f) of section 2 of the Central Excise Act, 1944, it will not be taxable under section 65(76b) of the Finance Act.
   

• As per the conditions of tender notice, separate charges are levied for the service, which is provided by the distillers. The successful tenderer shall supply country spirit filled in a semi-automatic bottling plant in the supply area. It will be the responsibility of the successful tenderer to receive the empty bottles from the retail contractor at the issue warehouses. The service was to be provided for the purpose of packaging, which was controlled under the condition of tender notice and separate charges were paid for bottling, labelling and sealing, which was not forming part of the price of the country spirit. For country spirit, separate bills were raised and for the packaging activity service charges were prescribed. Thus, there existed an element of service obligation to be fulfilled in the form of bottling. There was obligation to reuse the bottle offered by the contractors. The entire mechanism left no room for any doubt that it was
  packaging activity, which was clearly a service under section 65(76b) and not a process of manufacture as defined in section 2(f) of the Central Excise Act.

Verdict of the Court

• The activity of bottling, sealing and labelling of liquor is a ‘packaging activity’ within the provision of section 65(76b) of the Finance Act, 1994.
   

• The High Court on considering the definition of ‘excisable goods’ as per section 2(d) of the Central Excise Act, 1944 observed that that Chapter 22 of the Central Excise Tariff Act, 1985 covered beverages, spirits and vinegar. However, as per Chapter Note (4) alcoholic liquor for human consumption was not covered. Therefore, the activity of various distillers did not come under the purview of manufacture as defined in section 2(f) of the Central Excise Act, 1944. The bottled country liquor or its packing or re-packing activity had not been mentioned / specified in Central Excise Tariff Act. The High Court further observed that even if the manufacturing activity was considered, it was clear that manufacturing activity was de hors of event of its liability for the Central Excise as defined in section 2(f). Thus, packaging could not be said to be part of process of manufacture as defined in section 2(f) in the facts and circumstances of the instant case.
   

• Referring to the judgment of the Apex Court in the case of CCE vs. Jayant Oil Mills (P) Ltd. 1989 (40) ELT 287, where it was held that all processes do not amount to manufacture, the High Court stated that merely by providing service for bottling a new commodity, a new article did not come into being and it was clearly a service provided. The Court further relied on the judgment made in case of Aditya Mills Ltd. vs. Union of India [1988] 4 SCC 315, where it was held that "manufacture is complete as soon as by the application of one or more process, the raw material undergoes some change. The moment there is transformation into a new commodity commercially known as a separate and distinct commodity having its own character and use, ‘manufacture’ takes place".
  
  The High Court held that "packaging can be in the pouch or in different forms in a given situation and thus, it is a service part of the activity which is being taxed, which is independent of the process of manufacture as excluded in section 65(76b) inserted by the Finance Act, 2005 read with section 2(f).
   

• Distillers/ bottler, being service providers, shall be liable to pay service tax, in terms of section 68 (1) of the Finance Act, 1994, read with rule 6 of the Service Tax Rules, 1994. Service tax being an indirect tax, the element of service tax can be passed on to the service receiver based on the judgment delivered by the Apex Court in case of Tamil Nadu Kalyana Mandapam Association vs. Union of India (2004) 267 ITR 9/136 Taxman 596. The letter restraining the service provider from recovery of service tax from retail contractor cannot be said to be justified, though at the same time the Central Excise has to recover service tax from service provider only and not from retail contractor.