Marketing and advertisement are the most essential tools in any form of Industry, There are different types and forms of advertisement, in all forms of media viz., print, television, radio, etc. The advertisements promote a brand name, product/service feature, other allied or connected service/activity resulting in increased sales and better returns. Sales promotion and market research are also undertaken for increasing the marketability and sales of any product/service As per Cenvat Credit Rules, 2004 credit of Central Excise duty or Service tax paid on input or input services is available for payment of Central Excise duty or Service Tax on final product or output services. However the Service Tax department doesn’t leave any opportunity to deny such legitimate benefits. Notices have been issued to service providers asking them to reverse Cenvat credits taken on advertisements expenditures.
In a recent case the Hon’ble High Court of Bombay had an occasion to examine the input services eligible for Cenvat credit. In the case of Coca cola India Pvt. Ltd Vs. Commissioner of Central Excise, Pune III Commissionerate (STO 2009 BOM 1219) while deciding a host of other issues, the Hon’ble Judge Shri Ferdino I. Rebello, of High Court of Bombay discussed extensively the meaning of input services and opined as under : -
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).
The definition of input service, 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.
As per Rule 2 of Cenvat Credit rules, 2004 it would be clear that it is only those input services up to 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.
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.
The Hon’ble Judge held that 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. 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.
This ruling of the Hon’ble Bombay High Court will put at rest a number of litigation pending at various levels of judicial and quasi judicial forums on the issue of eligibility of service tax paid on advertisements sales promotion, market research for cenvat credit.