Service tax can be realised by Central Excise only from service provider, HC

Facts in Brief:

1. In these writ petitions the question involved is whether service tax on packaging i.e. bottling and labelling of liquor, can be exacted from the distillers and whether they can pass on this liability to the contractors obtaining the supplies from them.

2. The petitioners are distillers/retail contractors, licence has been granted for supply of country made liquor for the warehouses situated in various districts of the State of Madhya Pradesh to distillers. The retail contractors take supply from the distillers under the terms of CS-I licence issued to distillers and CS-II licence issued to the retail contractors.

3. The distiller is entitled to receive the cost price of liquor from the Government and the sealing and bottling charges from the retail contractors. The retail contractors are required to deposit the bottling and sealing charges in advance before lifting the country liquor from the warehouse. Licence (P-3) was issued to M/s. Vidhyachal Distilleries Pvt. Ltd. (in W.P. No. 2346/2006).

HC held as under,

4. As per provision of Section 68(1) of the Finance Act, 1994, "Every person providing taxable service to any person shall pay service tax at the rate specified in Section 66 in such manner and within such period as may be prescribed" and as per the provisions of Rule 6 of the Service Tax Rules, 1994, service tax is payable on the value of taxable services. Accordingly such distillers/bottlers shall pay service tax being a service provider.

5. Coming to the question whether liability can be passed on by the distillers/bottlers to the wholesalers/retail contractors. It is clear that service tax being an indirect tax, the element of service tax can be passed on to the service receiver so held by the Apex Court in T.N. Kalyana Mandapam Association v. Union of India and Ors. (supra).

6. It has not been disputed by Shri H.S. Shrivastava, learned Sr. Counsel that once packaging activity is held to be outside purview of Section 2(f) of Central Excise Act than service provider can pass on the liability on the retail contractors and so on. The submission raised is right and is supported by the aforesaid decision of the Apex Court, though the service tax can be realised by the Central Excise only from the service provider.

7. In the decision (P-II) rendered by the learned Single judge of this Court, the only question which was considered, was that "whether service tax could be realised by the Central Excise from the retail contractors, who were not service provider, in that context the decision was rendered. It was not the question agitated or decided whether liability could be passed on by the distillers (service provider) to the retail contractors, thus, in our opinion, the letter issued by the respondents Nos. 2 and 4 restraining the service provider from recovery of service tax from retail contractor cannot be said to be justified, though at the same time the Central Excise has to recover the service tax from service provider only and not from retail contractor.

8. Resultantly, it is held that it is open to the Central Excise to recover the service lax from the service provider under Section 65(76)(b) on the packaging activity as inserted by Finance Act, 2005 and service provider can pass on the liability to the retail contractors. Accordingly writ petitions are disposed of. Parties to bear their own costs as incurred. 

Case Reference - Vindhyachal Distilleries Pvt. ... vs State Of Madhya Pradesh.