Service tax demand quashed on fees paid to State Government on manufacture and trading of alcoholic beverages

The Customs, Excise & Service Tax Appellate Tribunal (CESTAT Bangalore) in the matter of United Spirits Limited Vs. Commissioner Of Central Taxes ruled out that Service tax demand quashed on fees paid to State Government on manufacture and trading of alcoholic beverages.

The issue involved in the present case is whether the appellant is liable to pay service tax on reverse charge basis on various fees paid by the appellant to the State Excise Department or to the Government or Government agencies during their business of manufacture, import and sale of alcoholic beverages for human consumption?

The learned counsel appearing for the appellant submits that the amount on which the service tax was demanded is towards the payment of various fees such as permit fee, import/export pass fee, excise escort charges, supervision charges, and other related charges, additional fees paid in relation to manufacture, import distribution and sale of liquor. He submits that the licence fee, permit fee, import pass fee and export pass fee are payable to the State Government for parting with its exclusive privilege to import, export and transport liquor, which is in terms of Entry 8 of List-II of Seventh Schedule of the Constitution of India; according to which, production manufacture, possession, transport, purchase and sale of intoxicating liquors is the ‘exclusive privilege’ of the State. He submits that there is no quid pro quo in the licence fee and service, if any, rendered by the State Government; the licence fee charged by the State Government is neither any tax nor any fee, but it is the consideration charged by the State Government for parting with its privilege and granting it to licensee for manufacture and sale liquor. He submits that the licence fee charged by the State Government is not subject to tax as the same is not for any service. Pursuant to the GST Council meeting minutes and consequential retrospective amendment vide Section 117 of the Finance Act, 2019, it became even more clear that service tax is not leviable or payable on the licence fee paid to the State Excise Department.

The Coram found out that, ” the adjudicating authority has confirmed the demand in respect of various fees paid to the State Government in respect of manufacture, import and sale of alcoholic liquor. The adjudicating authority, though dropped the demand on licence fee, but confirmed the demand on all other fees. In our considered view, there is no difference between the licence fee and other fees as these fees are not charged against any service provided by the State Government. These fees were charged as per the Statutory levy; therefore not against provision of any service. Since there is no service is existing against fee paid by the appellant to the State Government, service tax cannot be charged on the said fees.

Further, we note that Learned Commissioner has wrongly considered the fee paid by the appellant to the State Excise department and various other Government departments/agencies as having an element of a quid pro quo in it and hence services provided by the State Excise department. We also note that the fee charged for grant of license is not a consideration for service, but a price charged for “exclusive privilege” parted by the State, the export fee does not have an element of service and therefore not a service and accordingly not subject to levy of service tax.

Further, we may also note that the issue with respect to tax liability on license fee and other application fee paid to the State authorities continued to be an issue under GST as well and the GST Council in its 26th meeting on 10-3-2018 recommended that GST was not leviable on license fee and application fee, “by whatever name called”, payable for alcoholic liquor for human consumption and that this would apply mutatis mutandis to the demand raised by the Service Tax/Excise authorities on license fee for alcoholic liquor for human consumption in the pre-GST era i.e. for the period from April, 2016 to 30th June, 2017.”

The Appellate Authority ruled out that, “In view of our discussion above and by following the ratios of the various judgments relied upon by the appellant cited supra, we are of the considered opinion that the appellant is not liable to pay service tax on Export Pass fee, Import Pass fee, Permit fee, Excise Staff Salary and overtime allowances/charges and we set aside the demand on all these services. We confirmed the service tax demand on Storage License fee for CO2 which the appellant is liable to pay along with interest. We also hold that appellants are not liable to pay penalties in view of the fact that demand itself is not sustainable. In view of our discussion above, we allow the appeal of the appellant partly to the extent noted above. Hence, the appeal is partly allowed.

we are of the clear view that the fees paid by the appellant to the State Government during the course of manufacture and trading of alcoholic beverages does not amount to provision of any service. Accordingly, no service tax can be demanded. Hence, the impugned order is modified and appeal is allowed with consequential relief, if any.”

The Judgment was made by Hon’ble Mr. Ramesh Nair and Hon’ble Mr. P. Anjani Kumar.

The Petitioner was represented by Shri Prasad Paranjape and Respondent was represented Shri P. Rama Holla.

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