Ferdino I. Rebello, J.
1. The Appeal was admitted on the following questions:
(a) Whether services of advertising and marketing procured by the Appellants in respect of advertisements for aerated waters are covered by the definition of the words 'input services' as defined in Rule 2(1) of the CENVAT Credit Rules, 2004, when admittedly the Appellants manufacture concentrates exclusively used for the manufacture of the respective aerated waters which are advertised by the Appellants ?
b. Whether the advertisement or sales promotion of aerated waters undertaken by manufacturer of concentrate is covered by the inclusive part of the definition of 'input service' contained in Rule
2(1) of the CENVAT Credit Rules, 2004
2. The main question which is therefore, required to be considered, in the present Appeal, is whether the Appellants, who are manufacturers of non-alcoholic beverage bases (concentrates) are eligible to avail credit of the service-tax paid on advertising services, sales promotion, market research and the like availed by them and utilize such credit towards payment of excise duty on the concentrate. As now judicially recognized, Service tax is VAT which in turn is destination based consumption tax in a sense that it is on commercial activities and is not a charge on the business but on the consumer. Just as excise duty is a tax on value addition on goods. Service tax is on the value addition by rendition of service. See All India Federation of Tax Practitioners v. Union of India : (2007) 7 SCC 527.
2. Credit has been denied on the ground that the advertisements do not relate to concentrates manufactured by the Appellants. It is not disputed that the advertisement expenses incurred by the Appellant form part of the sale price of the concentrates on which duty has been paid.
3. The relevant rule which is under consideration is Rule 2(1) of the Cenvat Credit Rules, 2004 (hereinafter referred to as the said Rules ) which defines the word input service as under:
(1) 'input service' means any service, -
(i) used by a provider of taxable service for providing an output service; or
(ii) used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products upto the place of removal,,
and includes services used in relation to setting up, modernization, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises, advertisement or sales promotion, market research, storage upto the place of removal, procurement of inputs, activities relating to business, such as accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, and security, inward transportation of inputs or capital goods and outward transportation upto the place of removal;
4. The relevant facts to the extent necessary are now set out. The Appellants manufacture non-alcoholic beverage bases also known as concentrates. These concentrates are known and sold under the respective brand names such as Coca Cola, Fanta, etc. The concentrate is sold by the Appellants to bottling companies, who in turn sell the aerated beverages manufactured from the concentrates to distributors and who in turn sell it to retailers for the ultimate sale to the consumer.
5. The advertisement and sales promotion activities including market research are undertaken by the Appellant. There are different types and forms of advertisement, in all forms of media print, television, radio, etc.
These advertisements show that:
(i) they carry the brand name;
(ii) the bottle of aerated water may or may not feature in these print / outdoor advertisements, though they would feature in television advertisements,
(iii) some advertisements are restricted only to the brand name alongwith promotion of some other allied or connected service/activity.
The brand name and trade mark is licensed in favour of the Appellants by THE COCA-COLA COMPANY, USA.
6. On behalf of the Appellant learned Counsel submits that the definition of input service in Rule 2(1) contains the words means &. . and includes. When the definition clause contains the words means and includes, the words following the expression includes have the effect of enlarging the scope of the part of the definition preceding thereto.
The first part of the definition clause in Rule 2(1) covers a service provider and a manufacturer. Clause (i) relates to a provider of output service who can avail credit of the service-tax paid on input services used by the service provider for providing output service. Clause (ii) covers manufacturer who use the input service directly or indirectly, in or in relation to the manufacture of final products. The inclusive part of the definition which follows Clause (i) and (ii) has the effect of enlarging the scope of input services in respect of which the credit can be availed by either the service provider or the manufacturer, notwithstanding that such input services may not be covered by Clause (i) and (ii).
In the instant case, it is submitted that advertisement is an input service. The advertisement of the brand name and / or a combination of brand name with the soft drink has a direct relationship with the manufacture of concentrate inasmuch as the demand, and consequently the production, of concentrate depends on the consumption of the soft drink. There is a direct proportionate relationship between the increase in the demand for soft drink and the demand for concentrate. The concentrate manufactured by the Appellants is proprietary in nature, and is exclusively used to manufacture soft drinks of the specified brand. The advertisement of soft drink enhances the marketability of the concentrate manufactured by the Appellants.
7. Assuming without admitting that the advertisements of soft drinks directly affect the demand only for the soft drinks and not for the concentrates, in view of the fact that the correlation between the soft drinks and the concentrates is direct and proportionate, the advertisements indirectly enhance the marketability of the concentrates and are, therefore, covered by Clause (ii), which permits an indirect use in or in relation to the manufacture of the final product.
8. Once Revenue has accepted that the advertisement and sales promotion expenses of the bottled product form part of the sales price of the concentrate on which duty is charged and paid it is not then open to the Revenue to contend that in so far as availing credit of service tax, that is not allowable. They are estopped from so contending.
9. It is thus submitted that the Appellants are therefore, eligible under Clause (ii) as well as by virtue of the extended part of the definition of Rule 2(1) to avail of the credit to pay duty.
10. On behalf of the Intervener the learned Counsel submits that as under:
The expression includes enhances the scope of definition of input services. Similarly expression such as is illustrative and not exhaustive. The word business is to be understood as s continuous activity and not confined or restricted to mere manufacture of the product. Activities in relation to the business cover all activities that are related to the functioning of the business. Words relating further widens the scope of expression activities relating to business. The learned Counsel has taken us through various material including Finance Minister s Speech, Central Credit Rules, 2004 and various press notes issued under CENVAT Rules, the dictionary meaning of various expressions and various judicial pronouncements including of the House of Lords. It is submitted that service tax like CENVAT is basically value added tax which is operative through credit mechanism. It is consumption tax which ultimately must be borne by the consumer. It is therefore, submitted that in these circumstances, the activities of advertisement and or marketing and similarly other allied activities, even though may not be directly attributed to the advertisement of the final product, i.e. Bottled waters, none the less, is interconnected and as such a manufacturer of concentrate would also be entitled to utilize credit of service tax for payment of Cenvat duty on concentrate.
11. On behalf of the revenue it is submitted that what one has to look is the meaning of Input service in Rule 2 under CENVAT Credit Rules, 2004. On the consideration of the said rules, it would be clear that it is only those input services upto the point of outward transportation in respect of which credit can be utilized. Advertisement and or marketing in the instant case is not connected with the manufacture of concentrates but with the sale of aerated water manufactured out of the concentrates by the bottlers and not appellant. As such this will not be covered by the definition input services whether directly or indirectly or in relation to the manufacture of final products. In the instant case, the advertisement for aerated water cannot be considered as an advertisement for concentrates. They are therefore, not covered by the 2nd part of the definition of input services.
12. To understand the issues, let us look at the historical background leading to the rule.
Finance Ministers Speech explaining major step relating to credit introduced, in the Union Budget 2004--05
Prior to union budget 2004-05, excise duty paid on input and capital goods was available as credit towards payment of excise duties on final products. Similarly, service tax paid on input service was allowed as credit to be utilised against payment of service tax on output service. There was no provision for utilising credit of excise duty towards payment of service tax liability or vice-versa. The Finance Minister in his budget speech 2004-2005 2004 (169) ELT A59, announced the introduction of Cenvat Credit across goods and service. Para 148 of the said speech is reproduced herewith:
148. I propose to take major steps towards integrating the tax on goods and services. Accordingly I propose to extend credit of service tax and excise duty across goods and services. In order to neutralise the revenue effect of such extension and keeping in mind the mean cenvat rate, I propose to enhance the rate of service tax from 8% to 10%.
On the premise that credit would be available of service tax paid on input service, rate of service tax on services was increased from 8 to 10% with effect from 10.09.2004. Accordingly, assessee like Pepsi were reimbursing service tax to their service providers at the rate of 10%, instead of earlier rate of 8% with effect from 10.09.2004, on services like advertising agency service, broadcasting agency service etc.
13. Draft Cenvat Credit Rules, 2004 circulated by Ministry of Finance, New Delhi.
The draft Cenvat Credit Rules was circulated by the Ministry of Finance inviting comments from the trade and industry. The said draft rules defined the term input service as under:
(g1) Input service means any service
(i) Received and consumed by a service provider in relation to providing an output service; or
(ii) Used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products from the place of removal;
Explanation: Input service includes services used in relation to setting up a factory, premises of provider of output service or an office relating to such factory or premises, advertisement or sales promotion, procurement of inputs, activities relating to management of business, such as accounting, auditing, financing, recruitment and quality control.
14. Press Note dt. 12.08.2004 issued by Ministry of Finance, explaining the proposed scheme of Cenvat credit
A Press Note dated August 12, 2004, Para (iii) and (iv) 2004 (17) ELT T19, was issued along with the draft rules highlighting the salient features of Cenvat Credit Rules. The Relevant extract thereof is as under:
iii. In principle, credit of tax on those taxable services would be allowed that go to form a part of the assessable value on which excise duty is charged. This would include certain services which are received prior to commencement of manufacture but the value of which gets absorbed in the value of goods. As regards services received after the clearance of the goods from the factory, the credit would be extended on services received upto the stage of place of removal (as per Section 4 of Central Excise Act.) In addition to this, services like advertising, market research etc. which are not directly related to manufacture but are related to the sale of manufactured goods would also be permitted for credit.
iv. Full credit of service tax on services (such as telephone, security, construction, advertising service, market research etc.) which are received in relation to the offices pertaining to a manufacturer or service provider would also be allowed.
15. In support of their contention that Advertisement is a service used in relation to the manufacture of the final product, viz., Concentrate.
Counsel for assessee has advanced the following reasons in support:
(i) The advertisement relates to the brand of the Appellants since the brands Coca-Cola, Thums Up, Fanta, etc., are licensed to the Appellants;
(ii) The invoices of sale show that what is sold is Coca-Cola concentrate Fanta concentrate etc.
(iii) The concentrate and the soft-drink manufactured therefrom are proprietary in nature and there is a direct co-relation between the demand for soft drink and the demand/manufacture of concentrate.
(iv) The advertisement expenditure incurred in respect of soft drink forms part of the cost of manufacture of Concentrate;
(v) The advertisement of soft drink enhances the marketability of Concentrate.
(vi) The concentrate is manufactured by the Appellants for sale exclusively to the bottling companies who, in turn manufacture the soft drinks. The bottling companies, in their turn, buy the concentrate exclusively from the Appellants. The consumption of concentrate vis--vis the soft drinks is in a theoretically defined proportion. As there is no sale of the concentrate by the Appellants to any consumer other than the bottling companies, the singular manner of enhancing the marketability and demand for the Appellants products, therefore, is by enhancing the market for the soft drinks, for which purpose alone, the Appellant undertakes the activities such as market research and advertising.
16. According to the Applicant, advertisement of aerated water is integrally connected with manufacture and sale of concentrate. The concentrate/base is an essential intermediate product for the manufacture of relevant aerated water. The final product aerated water is simply obtained by diluting the concentrate with water, sugar and carbon dioxide. Essentially the flavour, taste etc. are derived from the concentrate. There is a direct co-relation between the concentrate/ base vis--vis aerated water. For example, the concentrate from Fanta Orange would be used for manufacturing Fanta Orange brand aerated water only and cannot be used for making Coca Cola or Thumps Up. In addition, concentrate of one brand name holder like Coca Cola is used solely and exclusively for the manufacture of the aerated water of the brand name holder. The dilution ratio between concentrate and aerated water is also pre-determined and fixed.
17. Further there is also a compelling commercial reason as to why concentrate is made in one place and the aerated water is manufactured by the bottler. The aerated water is removed by the bottler to the market in crates and bottles which are durable and reusable. They have to be constantly collected from the market, refilled and dispatched to the market. This involves constant handling and transporting of the crates and bottles. In addition, aerated water contains ordinary drinking water in large volume. Therefore, to avoid unnecessary transportation cost, world over, a business model is developed whereby the concentrate is made in one or more centralized location and the manufacture of the aerated water from the concentrate is made in bottling plants close to the respective markets. The bottler enters into the franchisee agreement with the concentrate supplier and brand holder. Usual commercial conditions are imposed in the franchisee agreements requiring the use of the concentrate, sticking to the specifications specified by the concentrate supplier/brand holder etc. A license to use the brand name would also be given to the bottler. Thus, the business arrangement is not confined to mere manufacture and sale of the concentrate to the bottler but is an integrated/integral arrangement related to the purchase of the concentrate, use of the brand name of the bottler, adhering to the terms and conditions of the franchisee agreement. Thus, the business of manufacture of concentrate does not end with the manufacture and sale of concentrate, but continues and extends much beyond that.
18. The commercial and compelling reason why the advertisement is done in the centralized manner by the concentrate supplier/brand name holder is sought to be explained. It is submitted that it would be impractical for the dozens of bottlers located all over the country catering to their respective market to advertise the brand name/produce at a national level. Thus to ensure uniformity and high quality advertisement, the advertisement is always done from one centralized location to cover the entire country and to maintain brand image, uniformity etc. In the instant case the concentrate manufacturer is also having bottling plants of its own in the form of a separate subsidiary company. 18A. Arguments were also advanced in respect of market research and other allied activities. However, no question was formulated on that count for our consideration. It is true as the subsequent discussion will show that the same test applicable to advertisements may have to be applied, but in the absence of a question formulated on that count, we decline to answer that issue.
19. To answer the questions framed we shall have first to answer as, what constitutes manufacturing cost? The Supreme Court in Union of India v. Bombay Tyres International 1983 (14) ELT 1896 (SC) has held that all elements given to enrich the value of the excisable goods and contribute to its marketability, must form part of the manufacturing cost of the goods. The relevant portion of paragraph 4 9 of the said judgment is reproduced herein:
49. We shall now examine the claim. It is apparent that for purposes of determining the value, broadly speaking both the old Section 4(a) and the new Section 4(1)(a) speak of the price for sale in the course of wholesale trade of an article for delivery at the time and place of removal, namely, the factory gate. Where the price contemplated under the old Section 4(a) or under the new Section 4(1)(a) is not ascertainable, the price is determined under the old Section 4(b) or the new Section 4(1)(b). Now, the price of an article is related to its value (using this term in a general sense), and into that value how poured several component, including those which have enriched its value and given to the article is marketability in the trade. Therefore, the expenses incurred on account of the several factors which have contributed to its value upto the date of sale, which apparently would be the date of delivery, are liable to be included. Consequently, where the sale is effected at the factory gate, expenses incurred by the assessee upto the date of delivery on account of storage charges, outward handling charges, interest on inventories (stocks carried by the manufacturer after clearance), charges for other services after delivery to the buyer, namely after-sales service and marketing and selling organisation expenses including advertisement expenses cannot be deducted. It will be noted that advertisement expenses, marketing and selling organisation expenses and after-sales service promote the marketability of the article and enter into its value in the trade. Where the sale in the course of wholesale trade is effected by the assessee through its sales organisation at a place or places outside the factory gate, the expenses incurred by the assessee upto the date of delivery under the aforesaid heads cannot, on the same grounds, be deducted. But the assessee will be entitled to a deduction on account of the cost of transportation of the excisable article from the factory gate to the place or places where it is sold. The cost of transportation will include the cost of insurance on the freight for transportation of the goods from the factory gate to the place or places of delivery.
20. The principles that flow from the Judgment in Bombay Tyre International s case
a. In terms of Section 3 of the Central Excise Act which is the charging section, duty of excise is leviable on all excisable goods manufactured in India at the rate specified in the Central Excise Tariff.
b. In terms of Section 4 of the Central Excise Act, where the rate of duty specified in the tariff is based on value, then such value is the sale price paid or payable for the excisable goods.
c. In the case of Bombay Tyre International, the Supreme Court was considering the challenge to the levy of Central Excise duty on the basis of sale price. The assessees contended that the levy was on the manufacture of the goods and therefore the levy of Central Excise duty should be only on manufacturing cost and manufacturing profit. However, the Supreme Court held that even though the levy was on the manufacture, the measure can be with reference to the sale price.
d. In this context, the Supreme Court observed that the price of article is related to its value and into that value several components are poured including those which have enriched its value and give to the article its marketability in the trade. Accordingly, the Supreme Court held that the expenses for marketing and selling the articles, including advertisement and publicity expenses would be one of the several components poured into the value of the goods under assessment and hence rejected the claim of the assessee, that value for levy of duty, should be only manufacturing cost and profit. Supreme Court therefore held that from the price, advertisement cost cannot be deducted.
21. That Advertisement of soft drink enhances the marketability of the Concentrate in our opinion is no longer res intergra as it has been recognized in the following judgments:
Pepsi Foods Ltd. v. Collector : 1996 (82) ELT 33 (T) where the Supreme Court affirmed the view taken in Collector v. Pepsi Foods Ltd. 1997 (91) ELT 544 and in Pepsi Foods Limited v. CCE, : 2003 (158) ELT 552 (SC) where the royalty paid by the bottler to the assessee was held to be includable in assessable value. The Respondents on this premise have always been collecting excise duty on full sale price charged by concentrate manufacturer from the bottler. Revenue has never disputed that advertisement of aerated water is an activity related to manufacture and sale of concentrate and that cost of advertisement is relatable to aerated water which forms part of value of concentrate in the hands of concentrate manufacturer and hence should be included in the sale price of concentrate charged by the concentrate manufacturer. On the other hand, since advertisement of aerated water promoted marketability of concentrate, manufacturers of concentrate are subject to excise duty, in terms of principles laid down in Bombay Tyre International case, without excluding it from the sale price of concentrate charged by the concentrate manufacturer.
22. In Philips India Ltd v. Commissioner of Customs and Excise : 1997 (91) ELT 540 the Hon'ble Supreme Court held that where the cost of advertisements was borne half and half by the manufacturer and dealer, no deduction is permissible because the advertisement may benefit in equal degree, the manufacturer and dealer. The Hon'ble Court further held in that legitimate business consideration must be kept in mind in adjudicating such matters under Central Excise.
23. We now propose to consider some of the expressions used in the definition of input service. Firstly what does the expression means and includes mean. The definition of input service uses the term means and includes. These expression must be understood as now judicially recognized. In Regional Director v. High Land Coffee Works : 1991 (3) SCC 617, the Hon'ble Supreme Court has held as under:
The word include in the statutory definition is generally used to enlarge the meaning of the preceding words and it is by way of extension, and not with restriction. The word include is very generally used in interpretation clauses in order to enlarge the meaning of words or phrases occurring in the body of the statute; and when it is so used, these words or phrases must be construed as comprehending, not only such things as they signify according to their natural import but also those things which the interpretation clause declares that they shall include. [See (i) Stroud s Judicial Dictionary, 5th edn. Vol. 3, p. 1263 and (ii) C.I.T. v. Taj Mahal Hotel 1, (iii) State of Bombay v. Hospital Mazdoor Sabha
This has been reiterated in C.I.T. v. T.T.K. Health Care Ltd. (2007) 11 SCC 796.
In Mahalakshmi Oil Mills v. State of Andhra Pradesh : AIR 1989 Supreme Court 335, the Court dealing with the expression means and includes observed as under:
As Lord Watson observed in Dilworth v. Commissioner of Stamps [1899] AC 99 the joint use of the words 'mean and include' can have this effect. He said, in a passage quoted with approval in earlier decisions of this Court:Section 2 is, beyond all question, an interpretation clauses, and must have been intended by the Legislature to be taken into account in construing the expression 'charitable device or bequest, ' as it occurs in Section 3. It is not said in terms that 'charitable bequest' shall mean one or other of the things which are enumerated, but that it shall 'include' them. The word 'include' is very generally used in interpretation clauses in order to enlarge the meaning of words or phrases occurring in the body of the statute; and when it is so used these words or phrases must be construed as comprehending, not only such things as they signify according to their natural import, but also those things which the interpretation clause declares that they shall include. But the word 'include' is susceptible of another construction, which may become imperative, if the context of the Act is sufficient to show that it was not merely employed for the purpose of adding to the natural significance of the words or expressions defined.
It may be equivalent to 'mean and include' and in that case it may afford an exhaustive explanation of the meaning which, for the purposes of the Act, must invariably be attached to these words or expressions.
The Supreme Court in the case of Bharat Coop. Bank (Mumbai) Ltd. v. Coop. Bank Employees Union : (2007) 4 SCC 685 observed as under:
It is trite to say that when in the definition clause given in any statute the word 'means' is used, what follows is intended to speak exhaustively. When the phrase 'means' is used in the definition, to borrow the words of Lord Esher M.R. in Gough v. Gough (1891) 2 Q.B. 665 it is a 'hard and fast' definition and no meaning other than that which is put in the definition can be assigned to the same. (Also see: P. Kasilingam and Ors. v. P.S.G. College of Technology and Ors. ). On the other hand, when the word 'includes' is used in the definition, the legislature does not intend to restrict the definition; makes the definition enumerative but not exhaustive. That is to say, the term defined will retain its ordinary meaning but its scope would be extended to bring within it matters, which in its ordinary meaning may or may not comprise. Therefore, the use of the word 'means' followed by the word 'includes' in Section 2(bb) of the ID Act is clearly indicative of the legislative intent to make the definition exhaustive and would cover only those banking companies which fall within the purview of the definition and no other.
Considering these judicial pronouncements, it is clear that the expression means and includes is exhaustive. By the word includes services which may otherwise have not come within the ambit of the definition clause are included and by the words means these are made exhaustive.
24. The next expression to be considered from the definition is such as. A few dictionary meanings of the term such as are reproduced Concise Oxford Dictionary, Such as means for example or of a kind that; Chambers Dictionary, Such as means for example:
In Good Year India Ltd v. Collector of Customs : 1997 (95) ELT 450 the Supreme Court observed as under:The words such as stainless steel, nickel monel, incoloy, hastelloy in sub-heading (2) are only illustrative of the various metals from which valves can be made but the said description is not exhaustive of the metals.
The words such as therefore are illustrative and not exhaustive. In the context of business, these are services, related to the business. They may not be exhaustive, but are illustrative.
25. The expression Business is an integrated/continuous activity and is not confined restricted to mere manufacture of the product. Therefore, activities in relation to business can cover all the activities that are related to the functioning of a business. The term business therefore, in our opinion cannot be given a restricted definition to say that business of a manufacturer is to manufacture final products only. In a case like the present, business of assessee being an integrated activity comprising of manufacture of concentrate, entering in to franchise agreement with bottlers permitting use of brand name by bottlers promotion of brand name, etc. the expression will have to be seen in that context See (i) Pepsi Foods Ltd. v. Collector : 1996 (82) ELT 33, (ii) Pepsi Foods Ltd. v. Collector : 2003 (158) ELT 552 (SC).
The Hon'ble Supreme Court in State of Karnataka v. Shreyas Paper Pvt Ltd 2006 SCC affirmed the view taken by the Hon'ble Karnataka High Court reported at 2001 (121) STC 738, which, inter alia, held as under:
Business comprises of the regular and systematic activity with an object of earning of profits. The machinery, plant, building and the land over which they have erected or constructed are only the tools of such business. Assets and liabilities including goodwill are the necessary ingredients to constitute a business, besides the stocks and other movable and immovable items connected with the said business.
In Mazgaon Dock Ltd. v. Commissioner of Income-tax and Excess Profits Tax : AIR 1958 SC 861 the Hon'ble Supreme Court held as follows:
14. ...The word 'business' is, as has often been said, one of the wide import and in fiscal statutes, it must be construed in a broad rather than a restricted sense.
15. 'The word 'business' connotes', it was observed by this Court in Narain Swadeshi Weaving Mills v. Commissioner of Excess Profits Tax : 1955 1 SCR 952 'some real, substantial and systematic or organised course of activity or conduct with a set purpose.
The term business' therefore, particularly in fiscal statutes is of wide import.
26. The definition of input service employs the phrase activity relating to business. The words relating to further widens the scope of the expression activities relating to business. This is in view of following observations of Supreme Court in Doypack Systems (P) Limited v. Union of India : 1988 (36) ELT 201 (SC), interpreting the expression in relation to:
48. The expression in relation to (so also pertaining to ), is a very broad expression which pre-supposes another subject matter. These are words of comprehensiveness which might both have a direct significance as well as an indirect significance depending on the context, see State Wakf Board v. Abdul Aziz A.I.R. 1968 Mad 79, 81 paragraphs 8 and 10, following and approving Nitai Charan Bagchi v. Suresh Chandra Paul 66 C.W.N. 767, Shyam Lal v. M. Shayamlal : A.I.R. 1933 All. 649 and 76 Corpus Juris Secundum 621. Assuming that the investments in shares and in lands do not form part of the undertakings but are different subject matters, even then these would be brought within the purview of the vesting by reason of the above expressions. In this connection reference may be made to 16 Corpus Juris Secundum at pages 620 and 621 where it is stated that the term relate is also defined as meaning to bring into association or connection with. It has been clearly mentioned that relating to has been held to be equivalent to or synonymous with as to concerning with and pertaining to. The expression pertaining to is an expression of expansion and not of contraction.
The expression Relating to thus widens the scope of the definition.
27. Similarly, the use of the word activities in the phrase activities relating to business further signifies the wide import of the phrase 'activities relating to business. The Rule making authority has not employed any qualifying words before the word activities, like main activities or essential activities etc. Therefore, it must follow that all and any activity relating to business falls within the definition of input service provided there is a relation between the manufacturer of concentrate and the activity. Therefore, the phrase 'activities relating to business are words of wide import.
28. In CIT v. Chandulal Keshavlal & Co. : (1960) 38 ITR 601 (SC) the Apex Court held as under:
The test laid down by this case therefore was that in the absence of fraud or an oblique motive and if a transaction is of a nature which is entered in the course of a business of the assessee and is commercially expedient that it does become a deductible allowance. If as a result of the transaction the assessee benefits is immaterial that a third party also benefits thereby.
Similarly, in Eastern Investments Limited v. CIT : 1951 (20) ITR 1 the Hon'ble Apex Court held as under:
& Most commercial transactions are entered into for the mutual benefit of both sides, or at any rate each side hopes to gain something for itself. The test for present purposes is not whether the other party benefited, nor indeed whether this was a prudent transaction which resulted in ultimate gain to the appellant, but whether it was properly entered into as a part of the appellants legitimate commercial undertakings in order to indirectly facilitate the carrying on of its business
Further, in Commissioner of Income Tax v. Royal Calcutta Turf : 1961 (41) ITR 414 it was held that deduction may be allowed in cases where the payment or expenditure is incurred for the purpose of the trade of the subject making the return and it does not matter that this payment may inure to the benefit of a third party.
29. The above test was followed by the Hon'ble Allahabad High Court in Additional Commissioner of Income Tax v. Symonds Distributors (P) Ltd. : (1977) 108 ITR 947 (ALL) wherein the dispute was that if a sales company voluntarily reduced its own commission which it received from the manufacturing company so as to support the manufacturing unit, whether it amounts to a business expenditure? The claim was disallowed by ITO and AAC on appeal. The tribunal allowed the expenditure on the finding that the same has incurred wholly and exclusively for the purpose of assessee s business out of commercial expediency. This view was upheld by the Hon'ble High Court observing as under:
A sum of money expended, not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the grounds of commercial expediency, and in order indirectly to facilitate the carrying on of the business, may yet be expended wholly and exclusively for the purposes of the trade. This test has been quoted with approval and applied by the Supreme Court in Eastern Investments Ltd. v. CIT : 1951 20 ITR 1 SC.
30. The House of Lords in the context of Credit under VAT itself, in Customs and Excise Commissioners v. Redrow Group Pic. 1999 Simon Tax Cases 161 has taken an identical view relating to input VAT deduction. Facts of that case, briefly stated as under:- Redrow was involved in constructing new houses for sale to the prospective customers. The prospective customer of a Redrow home had an existing home to sell and cannot purchase unless and until they have a buyer for their existing home. Redrow, therefore, declares a sales incentive scheme to deal with this problem. Redrow chooses a real estate agent to value the prospective purchaser s existing home and handle it s sale. Redrow pays the estate agent s fee on the sale of the prospective purchaser s home only if the prospective purchaser completes the purchase of Redrow home. The estate agent charge Redrow his fee plus applicable VAT on that. Redrow claimed input tax credit of the same. The Commissioner disallowed the deduction. Value Added Tax Tribunal allowed Redrow s appeal. On appeal by the Commissioner, the Queen s Bench dismissed the Revenue s appeal. However, on further appeal the Court of Appeal reversed the matter in favour of the revenue. On appeal by Redrow, House of Lord reversed the decision of the Court of Appeal and allowed Redrow s claim.
The Relevant extract from the speech of Lord Hope of Craighead, is set out as under:
Clearly the estate agents were supplying services to the prospective purchasers, as they were engaged in the marketing and sale of the existing homes which belonged to the prospective purchasers and not to Redrow. But Redrow was prepared to undertake to pay for these services in order to facilitate the sale of its homes to the prospective purchasers. The estate agents received their instructions from Redrow and, so long as the prospective purchasers completed with Redrow, it was Redrow who paid for the services which were supplied. I do not see how the transactions between Redrow and the estate agents can be described other than as the supply of services for a consideration to Redrow. The agents were doing what Redrow instructed them to do, for which they charged a fee which was paid by Redrow.
The word services is given such a wide meaning for the purposes of value added tax that it is capable of embracing everything which a taxable person does in the course or furtherance of a business carried on by him which is done for a consideration. The name or description which one might apply to the service is immaterial, because the concept does not all for that kind of analysis. The service is that which is done in return for the consideration. As one moves down the chain of supply, each taxable person receives a service when another taxable person does something for him in the course or furtherance of a business carried on by that other person for which he takes a consideration in return. Questions such as who benefits from the service or who is the consumer of it are not helpful. The answers are likely to differ according to the interest which various people may have in the transaction. The matter has to be looked at from the standpoint of the person who is claiming the deduction by way of input tax. Was something being done for him for which, in the course or furtherance of a business carried on by him, he has had to pay a consideration which has attracted value added tax? The fact that someone else in this case, the prospective purchaser also received a service as part of the same transaction does not deprive the person who instructed the service and who has had to pay for it of the benefit of the deduction.
Then in the speech of Lord Millet it was thus observed:
The solution lies in two features of the tax to which I have already referred. The first is that anything done for a consideration which is not a supply of goods constitutes a supply of services. This makes it unnecessary to define the services in question. The second is that unless the services are rendered for a consideration they cannot constitute the subject matter of a supply. In fact, of course, there can be no question of deducting input tax unless the taxpayer has incurred a liability to pay it as part of the consideration payable by him for a supply of goods or services.
In my opinion, these two factors compel the conclusion that one should start with the taxpayer's claim to deduct tax. He must identify the payment of which the tax to be deducted formed part; if the goods or services are to be paid for by someone else he has no claim to deduction. Once the taxpayer has identified the payment the question to be asked is: did he obtain anything -- anything at all -- used or to be used for the purposes of his business in return for that payment? This will normally consist of the supply of goods or services to the taxpayer. But it may equally well consist of the right to have goods delivered or services rendered to a third party. The grant of such a right is itself a supply of services.
Conclusion
It is sufficient that the taxpayer obtained something of value in return for the payment of the agents' fees in those cases where it became liable to pay them, and that what it obtained was obtained for the purposes of the taxpayer's business. Both those conditions are satisfied in the present case. It is not necessary that there should be 'a direct and immediate link' between the services supplied by the agent and the sale of a particular Redrow home, although if it were necessary then this condition too would be satisfied on the facts of the present case. From the taxpayer's standpoint, which is what matters, the agent's fees incurred in the sale of a prospective purchaser's own home are not part of the taxpayer's general overhead costs but a necessary cost of and exclusively attributable to the sale of a Redrow home to that same purchaser. If the sale of the Redrow home were an exempt supply and not merely zero-rated, the agent's fees would not be deductible for the reasons given by the Court of Justice in B.L.P. Group Pic. v. Customs and Excise Commissioners (Case C-4/94) [1996] 1 W.L.R. 174.
I would allow the appeal and affirm the decision of the value added tax tribunal.
31. CBEC by Circular No. 80/10/2004-ST dated 17.09.2004, inter alia, clarified as under:
Service Tax like CENVAT is basically a value added tax which is operated through credit mechanism
32. CBEC Circular No. 56/5/2003-S.T. dated 25.04.2003 issued in the context of export of services, clarified that service tax is a consumption tax. Relevant extract is reproduced herewith as under (remaining paragraphs in context of export of services are not quoted here):
I am directed to clarify that the Service Tax is destination based consumption tax and it is not applicable on export of services.
32A. Name of tax was rechristened as Cenvat w.e.f. 12.05.2000. Section 3 of Central Excise Act, 1944 as it stood before 12.05.2000 read as under:
SECTION 3. Duties specified in the [the First Schedule and the Second Schedule] to the Central Excise Tariff Act, 1985 to be levied
(a) a duty of excise on all excisable goods which are produced or manufactured in India as, and at the rates, set forth in the First Schedule to the Central Excise Tariff Act, 1985 (5 of 1986);
(b) a special duty of excise, in addition to the duty of excise specified in Clause (a) above, on excisable goods specified in the Second Schedule to the Central Excise Tariff Act, 1985 (5 of 1986) which are produced or manufactured in India, as, and at the rates, set forth in the said Second Schedule.....
Section 3 of Central Excise Act, 1944 as it stands after 12.05.2000 reads as under:
SECTION 3. Duties specified in [First Schedule and the Second Schedule] to the Central Excise Tariff Act, 1985 to be levied
(a) a duty of excise to be called the Central Value Added Tax (CENVAT) on all excisable goods which are produced or manufactured in India as, and at the rates, set forth in the First Schedule to the Central Excise Tariff Act, 1985 (5 of 1986);
(b) a special duty of excise, in addition to the duty of excise specified in Clause (a) above, on excisable goods specified in the Second Schedule to the Central Excise Tariff Act, 1985 (5 of 1986) which are produced or manufactured in India, as, and at the rates, set forth in the said Second Schedule. && .
33. The above amendment will show that the manifest object of legislature is to levy and collect excise duty as a value added tax. The Supreme Court in All India Federation of Tax Practitioners v. Union of India (supra) has explained that excise duty and service tax are value added taxes. They are consumption taxes. Justice Kapadia, speaking for the Bench has observed as under:
6. At this stage we may refer to VAT which is a general tax that applies in principle to all commercial activities involving production of goods and provision of services. VAT is a consumption tax that is borne by the consumer.
7. In the light of what is stated above, it is clear that service tax is a VAT which in turn is a destination based consumption tax in the sense that it is on commercial activities and is not a charge on the business but on the consumer and it would logically be leviable only on services provided within the country. Service tax is a value added tax.
8. As stated above, service tax is VAT. Just as excise duty is a tax on value addition on goods, service tax is on value addition by rendition of services. Therefore, for our understanding, broadly services fall into two categories, namely, property based services and performance based services. Property based services cover service providers such as architects, interior designers, real estate agents, construction services, mandapwalas etc. Performance based services are services provided by service providers like stockbrokers, practising chartered accountants, practising cost accountants, security agencies, tour operators, event managers, travel agents etc..
20. On the basis of the above discussion, it is clear that service tax is VAT which in turn is both a general tax as well as destination based consumption tax leviable on services provided within the country.
34. It is therefore, clear that the burden of service tax must be borne by the ultimate consumer and not by any intermediary i.e. manufacturer or service provider. In order to avoid the cascading effect, the benefit of cenvat credit on input stage goods and services must be ordinarily allowed as long as a connection between the input stage goods and services is established. Conceptually as well as a matter of policy, any input service that forms a part of the value of the final product should be eligible for the benefit of Cenvat Credit.
Revenues contention, if accepted as in the present case, would go against the very core and genesis of Cenvat credit scheme. In our opinion, such an interpretation would be plainly unacceptable.
35. The guidelines issued by OECD that VAT is a consumption tax, accords with the view taken by the Supreme Court. Guidelines issued by Organization for
Economic Co-operation and Development (OECD). The relevant portion is extracted below:
INTERNATIONAL VAT/GST GUIDELINES
PREFACE
4. ...In addition, it should be borne in mind that value added tax systems are designed to tax final consumption and as such, in most cases it is only consumers who should actually bear the tax burden. Indeed, the tax is levied, ultimately, on consumption and not on intermediate transactions between firms as tax charged on these purchases is, in principle, fully deductible. This feature gives the tax its main characteristic of neutrality in the value chain and towards international trade.
>CHAPTER I
BASIC PRINCIPLES
I.A. INTRODUCTION
1. There are many differences in the way value added taxes are implemented around the world and across OECD countries. Nevertheless, there are some common core features that can be described as follows:
1. Value added taxes are taxes on consumption, paid, ultimately, by final consumers.
2. The tax is levied on a broad base (as opposed to e.g., excise duties that cover specific products);
3. In principle, business should not bear the burden of the tax itself since there are mechanisms in place that allow for a refund of the tax levied on intermediate transactions between firms.
4. The system is based on tax collection in a staged process, with successive taxpayers entitled to deduct input tax on purchases and account for output tax on sales. Each business in the supply chain takes part in the process of controlling and collecting the tax, remitting the proportion of tax corresponding to its margin i.e. on the difference between the VAT paid out to suppliers and the VAT charged to customers. In general, OECD countries with value added taxes impose the tax at all stages and normally allow immediate deduction of taxes on purchases by all but the final consumer.
2. These features give value added taxes their main economic characteristic, that of neutrality. The full right to deduction of input tax through the supply chain, with the exception of the final consumer, ensures the neutrality of the tax, whatever the nature of the product, the structure of the distribution chain and the technical means used for its delivery (stores, physical delivery, Internet).
36. Though India is not a signatory to OECD Model, it adopts the same model of destination based consumption tax rule as is clear from the aforesaid clarifications issued by the CBEC as well as the law laid down by the Hon'ble Supreme Court in All India Federation of Tax Practioners s case (supra) The basic approach adopted by India is to tax services on the destination cum consumption principle, which is in line with international norms. Therefore, OECD Guidelines can be safely considered.
37. A consumption tax derives its name from the fact that tax burden is ultimately borne by the final consumer and business does not bear the burden of the tax, since the business are allowed to take credit of tax paid on inputs supplied/received by them. If therefore Cenvat is denied to the input service received by the assessee as in the present case, they will become burden to the assessee, which is against the very grain or principle of VAT being a consumption tax.
38. Service tax therefore, paid on expenditure incurred by the assessee on advertisements sales promotion, market research will have to be allowed as input stage credit more particularly if the same forms a part of the price of final product of the assessee on which excise duty is paid. In other words, credit of input service must be allowed on expenditure incurred by the assessee which form a part of the assessable value of the final product. If the above is not done, as sought to be done by the department in the present case, it will defeat the very basis and genesis CENVAT i.e. value added tax.
39. The definition of input service which has been reproduced earlier, can be effectively divided into the following five categories, in so far as a manufacturer is concerned:
(i) Any service used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products
(ii)Any service used by the manufacturer whether directly or indirectly, in or in relation to clearance of final products from the place of removal
(iii) Services used in relation to setting up, modernization, renovation or repairs of a factory, or an office relating to such factory,
(iv) Services used in relation to advertisement or sales promotion, market research, storage upto the place of removal, procurement of inputs,
(v) Services used in relation to activities relating to business and outward transportation upto the place of removal;
Each limb of the definition of input service can be considered as an independent benefit or concession or exemption. If an assessee can satisfy any one of the limbs of the above benefit, exemption or concession, then credit of the input service would be available. This would be so even if the assessee does not satisfy other limb/limbs of the above definition. To illustrate, input services used in relation to setting up, modernization, renovation or repairs of a factory will be allowed as credit, even if they are assumed as not an activity relating to business as long as they are associated directly or indirectly in relation to manufacture of final products and transportation of final products upto the place of removal. This would follow from the observation of the Supreme Court in Kerala State Co-operative Marketing Federation Ltd. and Ors. v. Commissioner of Income-tax : 1998 (5) SCC 48, which is as under:
7. We may notice that the provision is introduced with a view to encouraging and promoting growth of co-operative sector in the economic life of the country and in pursuance of the declared policy of the Government. The correct way of reading the different heads of exemption enumerated in the section would be to treat each as a separate and distinct head of exemption. Whenever a question arises as to whether any particular category of an income of a co-operative society is exempt from tax what has to be seen is whether income fell within any of the several heads of exemption. If it fell within any one head of exemption, it would be free from tax notwithstanding that the conditions of another head of exemption are not satisfied and such income is not free from tax under that head of exemption.
40. In Share Medical Care v. Union of India : 2007 (209) ELT 321 (SC) the Supreme Court has laid down the same proposition in the following words:
15. From the above decisions, it is clear that even if an applicant does not claim benefit under a particular notification at the initial stage, he is not debarred, prohibited or estopped from claiming such benefit at a later stage.
16. In the instant case, the ground which weighed with the Deputy Director General (Medical), DGHS for non-considering the prayer of the appellant was that earlier, exemption was sought under category 2 of exemption notification, not under category 3 of exemption notification and exemption under category 2 was withdrawn. This is hardly a ground sustainable in law. On the contrary, well settled law is that in case the applicant is entitled to benefit under two different Notifications or under two different Heads, he can claim more benefit and it is the duty of the authorities to grant such benefits if the applicant is otherwise entitled to such benefit. Therefore, non-consideration on the part of the Deputy Director General (Medical), DGHS to the prayer of the appellant in claiming exemption under category 3 of the notification is illegal and improper. The prayer ought to have been considered and decided on merits. Grant of exemption under category 2 of the notification or withdrawal of the said benefit cannot come in the way of the applicant in claiming exemption under category 3 if the conditions laid down thereunder have been fulfilled. The High Court also committed the same error and hence the order of the High Court also suffers from the same infirmity and is liable to be set aside.
41. The principle that a specific provision will override a general provision is not applicable to provisions which are in the nature of concessions or exemptions. We may consider the facts and some circumstances. In HCL Ltd. v. Collector of Customs 1998 (77) ECR 126 (T), Sl. No. 53 of Notification No. 96/61-Cus dated 25.07.1991 referred to automatic testing or marking or printing or typing machine or any combination thereof and exempted customs duty in excess of 20% ad valorem. Notification No. 59/88-Cus dated 01.03.1988 referred to optical time domain reflectometer and exempted customs duty in excess of 55% ad valorem. Assessee imported a optical time domain reflectometer. There was no dispute that product in question was a optical time domain reflectometer. Assessee claimed the benefit of Sl. No. 53 of Notification No. 96/61-Cus. CESTAT held that product is squarely and more specifically covered by Notification No. 59/88-Cus and rejected the assessee s contention. CESTAT held as under:
9 We have carefully considered the matter. We find that there is no dispute and it is an admitted position that the goods imported were optical time domain reflectometer. Optical time domain reflectometer are specifically described in Notification No. . 59/88-Cus., dt. 1.3.1988 which provided exemption to the goods specified in the Table annexed to that Notification No. 59/88-Cus. which was falling under Chapters 84, 85 or 90 of the Customs Tariff. The exemption was to the extent of the duty as was in excess of the amount calculated at the rate of 55% ad valorem. Subsequently, another Notification No. 96/91-Cus., dt. 25.7.1991 was issued which exempted the goods falling within the Chapters 82, 84, 85 and 90 of the Customs Tariff which was used in the electronic industries. The exemption available was to the extent of duty which was in excess of the amount calculated at 20% ad valorem. At serial No. 53 of the Table the following goods were covered:
Automatic testing or marking or printing or taping machine or any combination thereof.
We find that the goods imported were Optical Time Domain Reflectometer which was specifically covered by the already existing Notification No. 59/88-Cus. The description at serial No. 53 of the Table under Notification No. 96/91-Cus. was general in nature and it could not be said that the goods were equally covered by both the Notifications. When there is specific entry, it is settled position in law that the goods would be classified under that specific entry as against the general entry.
10. The learned Advocate had submitted that the Asstt. Collector, Customs had not disputed that the item in question was covered by serial No. 53 of Notification No. 96/91-Cus. We find that the Asstt. Collector, Customs had only referred that entry under Customs Notification No. 96/91-Cus. which was generic in nature and covered broad category of goods of particular nature. We find that he had held that the goods were not covered by serial No. 53 of Notification No. 96/91-Cus.
11. Learned Advocate had also referred that when two notifications were available to an assessee it was the option of the assessee to choose any one which was beneficial to him. He referred to the case-law in support of his contention.
We consider that in the present case the two notifications were not equally applicable to the goods in question. In one notification, the goods were specifically and categorically described while the description in another notification was general in nature. We consider that the case law will be applicable only when the two notifications are equally applicable to the goods and the manufacturer.
The Supreme Court in an appeal filed by the assessee in H.C.L. Limited v. Collector of Customs, New Delhi 2001 (130) E.L.T. 405 (S.C.) reversed the decision of CESTAT and held as under:The question in these appeals is covered in favour of the appellant by the order of this Court in Collector of Central Excise, Baroda v. Indian Petro Chemicals : 1997 (92) ELT 13. Where there are two exemption notifications that cover the goods in question, the assessee is entitled to the benefit of that exemption notification which gives him greater relief, regardless of the fact that the latter notification is general in its terms and the other notification is more specific to the goods.
42. Explanatory note by HSN to Heading 21.06 proves the integral link between concentrate manufactured by the assessee and the beverage (aerated water) manufactured by the bottler from it. The concentrate manufactured by the assessee in question has been classified and assessed to Cenvat (excise duty) under heading 21.06 by the Schedule to Central Excise Tariff Act, 1985. That heading is identical to heading 21.06 of organised system of nomenclature issued by WCO. In fact our Excise Tariff is based on HSN. Therefore, Supreme Court has repeatedly emphasized that the Explanatory Notes of HSN are valuable material for understanding the scope of various headings in the Central Excise Tariff. The relevant extract of the Explanatory Note of HSN of Heading 21.06 is as under:
21.06 FOOD PREPARATIONS NOT ELSEWHERE SPECIFIED OR INCLUDED.
The heading includes, inter alia:
(1) &..
(2) .,&. .
(3) &&
(4) &&
(5) &&
(6) &&
(7) Non-alcoholic or alcoholic preparations (not based on odoriferous substances) of a kind used in the manufacture of various non-alcoholic or alcoholic beverages. These preparations can be obtained by compounding vegetable extracts of heading 13.02 with lactic acid, tartaric acid, citric acid, phosphoric acid, preserving agents, foaming agents, fruit juices, etc. The preparations contain (in whole or in part) the flavouring ingredients which characterise a particular beverage. As a result, the beverage in question can usually be obtained simply by diluting the preparation with water, wine or alcohol, with or without the addition, for example, of sugar or carbon dioxide gas. Some of these products are specially prepared for domestic use; they are also widely used in industry in order to avoid the unnecessary transport of large quantities of water, alcohol, etc. As presented, these preparations are not intended for consumption as beverages and thus can be distinguished from the beverages of Chapter 22.
The heading excludes preparations of a kind used for the manufacture of beverages, based on one or more odoriferous substances (heading 33.02)
The above extract demonstrates that the concentrates contain the flavouring ingredient are charactertics of a particular beverage. The beverage in question is obtained simply by diluting the preparation with water, sugar and carbon-dioxide gas.
The Explanatory Note is therefore clear that there is a link between the concentrate and the beverage made from that. The above Explanatory Note also explains the rational for business being arranged in this industry in a particular manner. This method of doing business avoids unnecessary transport of large quantity of water. In addition, the bottles and crates have to be collected back from the shop keepers or dealers and taken back to the factory for filling the fresh batch on a constant basis. At all times, quality of beverage, marketing support of the beverages is done by the brand name holder-cum-concentrate manufacturer.
43. What follows from the above discussion is that the credit is availed on the tax paid on the input service, which is advertisement and not on the contents of the advertisement. Thus it is not necessary that the contents of the advertisement must be that of the final product manufactured by the person advertising, as long as the manufacturer can demonstrate that the advertisement services availed have an effect of or impact on the manufacture of the final product and establish the relationship between the input service and the manufacture of the final product. The manufacturer thereby can avail the credit of the service tax paid by him. Once the cost incurred by the service has to be added to the cost, and is so assessed, it is a recognition by Revenue of the advertisement services having a connection with the manufacture of the final product. This test will also apply in the case of sales promotion.
44. Having thus arrived at the conclusion on the meaning of the expression of input services and that manufacturer can avail of the credit of the services tax paid by him for payment of CENVAT duty, the question referred for our consideration will have to be answered as under : Question (a) is answered in the affirmative in favour of the assessee and against Revenue and question (b) again answered in the affirmative in favour of the assessee and against revenue.
In the light of the above, the impugned order of the Commissioner, Central Excise, Bombay III dated 31st July, 2006 and the order of the Tribunal dated 16th April, 2007 are set aside, the matter is restored to the file of the Commissioner, Central Excise to pass appropriate order in the light of what we have set out in the judgment.
Appeal disposed off accordingly.