IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION CENTRAL EXCISE APPEAL NO.118 OF 2007 M/s. Coca Cola India Pvt. Ltd. A Company incorporated under the provisions of the Companies Act, 1956 having its registered office at Gat No. 1109, Village Tirangut, Taluka Mulshi,District : Pune. &Appellants Vs. The Commissioner of Central Excise, Pune-III,having his office at ICE House, 411/A,Sasoon Road, Opp. Wadia College,Pune 411 001 &Respondents Mr. Vikram Nankani with Mr. Madhur R. Baya for the Appellants. Mr. A.S. Rao with Mr. Rajinder Kumar for the Respondents. Mr. V. Sridharan with Mr. Prakash Shah, Mr. J.H. Motwani, Mr. Bharat Raichandani and Mr. Jas Sanghvi i/by PDS Legal for Intervener. CORAM : FERDINO I. REBELLO & J.H. BHATIA, JJ. RESERVED ON : JULY 16, 2009 PRONOUNCED ON : 26th August, 2009 1 ORAL JUDGMENT (PER FERDINO I. REBELLO, J.) 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 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 Vs. 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 3 duty has been paid. 3. The relevant rule which is under consideration is Rule 2(l) of the Cenvat Credit Rules, 2004 (hereinafter referred to as the said Rules ) which defines the word input service as under: (l) "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, 4 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 5 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(l) 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. 6 The first part of the definition clause in Rule 2(l) 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 7 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. 8 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(l) 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 9 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 inter- connected 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 10 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 Minister s 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 11 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 12 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 13 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. (Emphasis supplied). 15. In support of their contention that Advertisement is a service used in relation to the manufacture of the final product, viz., Concentrate. 14 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 15 concentrate exclusively from the Appellants. The consumption of concentrate vis-à-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-à-vis aerated water. For example, the concentrate from Fanta Orange would be used for manufacturing Fanta Orange brand 16 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 17 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 18 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 Vs. 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 49 of the said judgment is reproduced herein: "49. We shall now examine the claim. It is apparent that for purposes of determining the 19 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 20 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 21 insurance on the freight for transportation of the goods from the factory gate to the place or places of delivery. [Emphasis supplied] 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 22 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: 23 Pepsi Foods Ltd. vs. Collector 1996 (82) ELT 33 (T) where the Supreme Court affirmed the view taken in Collector vs. Pepsi Foods Ltd. 1997 (91) ELT 544 and in Pepsi Foods Limited Vs. CCE, 2003 (158) ILT 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